Apple just fueled everyone's biggest fear about how companies are going to use their extra tax reform cash

Joe Ciolli

  • Apple announced it will buy back another $100 billion of its own stock on Tuesday, as part of its quarterly earnings report.

  • When the GOP tax law was passed, there were fears that companies would use the extra cash to enrich shareholders, rather than employees — and this would seem to fuel those concerns.

  • Apple's chief financial officer, Luca Maestri, defended the buyback on an earnings call Tuesday evening, saying the company's stock is undervalued and arguing it has enough cash to satisfy multiple corporate needs.

When President Donald Trump's massive tax plan was announced, experts immediately feared the worst about how companies would spend the additional cash they'd soon have for deployment.

They figured corporations would choose to enrich shareholders through buybacks and dividends, rather than reinvest in their own businesses or create jobs.

And their fears were valid. Back in 2004, the last time a tax holiday occurred, companies used a whopping 80% of their proceeds on share repurchases. This time around, Bank of America Merrill Lynch expects just 50% of it to be used for buybacks — but the jury is still out.

Apple didn't help matters much on Tuesday, when it said it'll buy back an additional $100 billion in stock — an eye-popping number that marks the biggest increase on record for a company already known for their history of massive repurchases.

Sure, the announcement boosted Apple's stock immediately — it was 3% higher in early trading on Wednesday — but it also fueled concerns that companies are spending their tax reform windfall with shareholders in mind, rather than employees.

Apple's chief financial officer, Luca Maestri, didn't seem particularly concerned on the company's earnings call on Tuesday. He rationalized the buyback authorization by saying Apple's stock is still undervalued, and said the firm is still sinking money back into its business.

Basically, the argument is that Apple has enough cash to handily do both. And since it recently expressed a desire to get its net cash balance down to zero, perhaps its recent behavior makes a bit more sense.

"Our balance sheet and our cash flow generation are strong and that allows us to invest significantly in our product roadmap and still return a very meaningful amount of capital to our shareholders," said Maestri on the call.

Looking outside of Apple, UBS finds that corporate reinvestment — as measured by capital expenditures — has surged 39% so far this earnings season. That's outpaced net share buybacks (16%) and dividends paid (11%) by more than double, and is the fastest rate since 2011, according to the firm's data.

That should put investor minds at ease somewhat as they study the use of tax reform proceeds. There appears to be enough cash floating around to meet multiple needs at once — and it would seem Apple is trying to do just that.

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