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Tax benefits From Apple Stock Buyback Will Outweigh Borrowing Costs

Tax benefits From Apple Stock Buyback Will Outweigh Borrowing Costs

Washington Post writer Allan Sloan says that the tax benefits of Apple’s plan to buy back $60 billion of its own stock will outweigh the cost of the loans it will take out to fund the buyback of the shares.

Apple Money

9to5Mac

If you’re wondering why a company with a cash balance of $145b would need to borrow $60b, it’s all about tax …

Around two-thirds of that cash hoard is held by Apple subsidiaries outside the USA, and if Apple brought the cash back home it would have to pay 35% corporation tax. Borrowing the money means Apple pays interest, but the tax saving more than cancels this out…

Says Sloan: “Let’s say Apple borrows money at an interest rate of 3 percent a year (which is more than it would probably pay), and uses it to buy back stock at the current price of about $410 a share. Each share that Apple buys back will reduce its annual dividend obligation by $12.20 a share, at the company’s current dividend rate. The interest on the borrowed money would be $12.30 a share — about the same as the dividend. But interest is tax-deductible, and dividends aren’t.”

So, at a 35% tax rate the money Apple would borrow would cost Apple $8 after taxes for each share it bought back. That looks much better on the books than the $12.20 after-tax cost of a $12.20 dividend.

I’ll bet the accountants and tax lawyers in our readership are all getting chills right now…

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