President Trump’s recently enacted tax reform contained a provision to encourage American companies to bring home billions of dollars they stashed overseas to avoid high U.S. tax rates. This “repatriation” section, allows American corporations to pay a one-time tax of between 8% and 15.5% when they repatriate money currently stashed in foreign banks.
Until now, when bringing foreign profits back to the U.S., these companies would have owed a hefty 35%. Economists estimated as much as $500 billion might flow back to the U.S. as a result of the new policy. Apple alone is expected to repatriate $250 billion. Cisco Systems expects to repatriate $67 billion whilePfizer looks to return $24 billion.
What are companies doing with all this repatriated cash? A lot. But most of the action is happening on balance sheets, with stock buybacks, debt reduction, acquisitions and dividend increases currently overshadowing expanded investment in facilities, employees or R&D.
Take Apple, for example. The tech behemoth is expected to use $100 billion of its repatriated cash to repurchase Apple stock.
Ely Lily, the global pharmaceutical outfit, will use much of the $2 billion that it’s bringing back home to pay down debt. Multinational biotech company Biogen is planning to use its $3.5 billion for mergers and acquisitions, and through this process of buying new companies, it intends to return capital to its shareholders. Johnson & Johnson, that stalwart of medical devices, pharmaceuticals and consumer packaged goods, is bringing back $12.0 billion, which it plans to use to fund some of their US operations, thus eliminating its need for borrowing.
Rockwell Automation is repatriating about $2.4 billion. To date, they’ve already brought back almost $1 billion, which the company used to pay down debt. Rockwell plans to use the remainder for stock share repurchases. If all goes as planned, the company will have close to zero short-term debt by year’s end.
But get this: United Technologies Corporation is slated to return $3.8 billion to reduce debt and… buy Rockwell Automation.
Sempra Energy expects to repatriate $4 billion. The company will use this money to pay down debt and strengthen its balance sheet. Holding company Franklin Resources is ushering back over $5 billion. Franklin is looking for opportunities for mergers and acquisitions and plans to spread the wealth with share repurchasing and increased dividends.
These are all net positive for the US, the economy, and the stock market. The companies that are benefiting from repatriation are clearly trying to use this windfall most effectively and competitively. Some are just striving to keep up with their peers, and others are trying to absorb their peers. Any potential increase in our dividend checks is icing on this proverbial cake.