Is AAPL Stock at Risk?
It’s an open secret that Apple Inc. (NASDAQ:AAPL) keeps extra cash in Ireland to lower its tax bill. But antitrust regulators in the European Union (EU) have never been fond of this tactic, so they sent Apple stock investors a $14.0-billion tax bill.
It’s a little unusual for EU authorities to call out a member nation on their tax policy but, then again, it’s Europe. They frequently throw a hissy fit over the size and power of tech firms, and this occasion is no different, except that AAPL stock hangs in the balance.
The antitrust watchdog argues that Apple negotiated a “sweetheart deal” with the Irish tax authorities. (Source: “State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion,” European Commission, August 30, 2016.)
These deals give special benefits to larger corporations which smaller firms—gasp—don’t have access to.
“The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion [~$14 billion] to Apple,” said European Commission leaders in a press release. “This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid.” (Source: Ibid.)
It’s a harsh sentence that could completely alter the company’s tax strategy over the next few years. We’ll talk about that long-term impact in just a second, but first let’s review how AAPL stock is affected in the near term.
Apple Stock in the Short Term
The company said it is going to appeal the EU decision, but let’s assume it has to pay the fine. For most companies, $14.0 billion is an earth-shattering amount of money.
The CEO would be huddled in a corner of his office, clinging to his golden parachute, and muttering fearfully about “commies” who want to take away his freedom. He would get even more scared if he had read what some analysts are saying about Apple stock.
“While we expect Apple may record an accrual in the financials relating to this matter, it’s too soon to make any adjustments to our valuation,” said a UBS analyst in a note to clients. “Taking out $14bn of net cash on a DCF has a $3-5 impact on share price.” (Source: “What a $14 billion tax bill means for Apple’s stock price,” Yahoo! Finance, August 30, 2016.)
Discounted cash flow (DCF) is how some analysts value companies. It is a tool that takes into account future cash flows and profits, but that doesn’t mean it is fool-proof. There are tons of assumptions that could throw off the results.
Moreover, we have to appreciate that AAPL stock is worth a cumulative $570.3 billion, and the company made $36.6 billion in the first three quarters of FY2016. It isn’t exactly starved for cash, so investors probably won’t get spooked by this fine.
Apple has more money that it knows what to do with. Even after AAPL stock investors get their buybacks and dividends, the firm is still laden with truckloads of cold, hard cash. It has bought companies, built a new campus, and poured money into research.
Yet none of that spending made a dent in Apple stock. I don’t think another $14.0 billion would either.
AAPL Stock in the Long Term
Over the long term, there’s a case to be made that this tax is good for Apple stock investors. Just think about it for a second. If the EU starts cracking down on “sweetheart deals” with member nations, Apple might be forced to repatriate its foreign profits.
They’ve avoided doing so for years. Last year, there was talk of a tax holiday that would allow companies to bring cash stateside at a low, one-time tax rate. But it hasn’t come to fruition, and the waters are turning choppy overseas.
The combined pressures from EU regulators and a weakening euro might push Apple into a corner. When the dust is settled, it could make more sense for the company to bring back the cash and hand it back to AAPL stock investors.
Even half of the firm’s nest egg would lead to unimaginable returns for Apple stock investors. That said, Apple’s ability to pay out huge dividends signals a shift in the tech landscape. It has become an elder statesman in the world of technology companies.
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