Apple just fueled everyone's biggest fear about how companies will use their extra tax-reform cash (AAPL)

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May 2, 2018 2:51 PM

When Congress passed the GOP tax law last year, there were fears across Wall Street that companies would use the cash saved to enrich shareholders rather than employees. Apple's $100 billion buyback announcement on Tuesday fueled those concerns.

When Congress passed the GOP tax law last year, there were fears that companies would use the cash saved to enrich shareholders rather than employees — and Apple's announcement 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 last year, 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 business or create jobs.

Their fears were valid. 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 that figure to be just 50% — but the jury is still out.

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

Sure, the announcement boosted Apple's stock, which was 3% higher in early trading on Wednesday. But it also fueled concerns that companies are spending their 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 was still sinking money back into its business.

Basically, the argument is that Apple has enough cash to do both handily. 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," Maestri said on the call.

Looking outside of Apple, UBS has found that corporate reinvestment — as measured by capital expenditures — has surged 39% so far this earnings season. That has 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 investors' minds at ease somewhat as they study the use of proceeds resulting from the new tax law. 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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