UBS Strategist Julian Emanuel wrote earlier about how repatriation could impact different sectors (link). Tech was a clear winner with the largest amount of cash overseas relative to market cap. Earlier this year we hosted Shane Lieberman, Director, Federal Affairs Manager in the US Office of Public Policy for UBS Americas (link). Shane pegged the odds of tax reform at 50% given a Republican president. With a Republican-controlled Congress and presidency, this view holds.
In this report we take a closer look at select tech companies that stand to benefit most from repatriation. Apple, Cisco, Intel and HP Enterprise have most cash offshore Apple leads in offshore cash with over $200bn in cash and investments, followed by Cisco, Intel, and HPE. As a percentage of market cap, NetApp, HPE, and Cisco are at the top. We explore three repatriation scenarios assuming 50%, 75%, and 100% of cash is repatriated at three different rates, 5%, 8%, and 11%. Shane believes 100% deemed repatriation at an 8% rate is most likely. This could bring back as much as $200bn in cash for Apple, $61bn for Cisco, $26bn for Intel, and $14bn for HPE. Buybacks the most likely beneficiary We think repatriated cash will likely be used for buybacks and M&A.
Special dividends have been used by Microsoft in the past but are rare. In some cases we expect repatriated cash to replace debt fueled buybacks (Apple). Some investors want Apple to make a major acquisition, but we remain skeptical as to whether Apple wants to integrate a large business into its existing organization. We think Cisco is more likely to repurchase its stock (link) while HPE could use the cash to both support buybacks and targeted M&A to support its hardware focus. Repatriation will help Intel compete at the higher range of dividend yields among peers.
We expect Lam to authorize around $1bn in repurchases at its investor day later this month. Other election implications Repatriation will likely come with broader tax reform. As tax reform proposals are presented we will have to assess the impact of a potential new tax regime. Concerns about immigration, foreign manufacturing, etc will be assessed in 2017. It’s tough to distinguish campaign rhetoric from policy without further details. Equities Americas Internet Services
Global Research Steven Milunovich, CFA Analyst Julian Emanuel Strategist Omar Elangbawy Strategist Stephen Chin Analyst John Roy, Ph.D. Analyst Benjamin Wilson, CPA Associate Analyst
2 The geographical scope of the analysis is the US and Canada – 23 markets covering ~10K hotels. We have four months of data and the first run was completed in September 2015. The goal of the analysis is to provide information around the rollout of Instant Booking.
Specific metrics we can track are the following:
IT Hardware & EMS Election Impacts UBS Research THESIS MAP MOST FAVORED LEAST FAVORED Apple (AAPL), HP Enterprise (HPE) Cisco (CSCO), Jabil (JBL) Lam Research (LRCX), Nvidia (NVDA), Intel (INTC) NetApp (NTAP) PIVOTAL QUESTIONS
Q: What is the impact of repatriation on our companies?
Many of our companies have greater than 50% of cash offshore. Tax reform that includes repatriation could result in a windfall of cash returning to the US available for M&A, capex, dividends, or buybacks. WHAT’S PRICED IN? We think little is priced in. Going into the election, most polls had Clinton winning. We think some investors may have viewed repatriation as a bipartisan issue given the amount each candidate planned to spend on infrastructure. Uncertainty as to Congressional control likely discounted any material impact though. UBS VIEW With most polls going into the election predicting Clinton as the winner, we think repatriation remained a relatively uncertain prospect.
However, with a Republican-controlled Congress and Presidency, we believe repatriation has at least a 50% chance of passing (link). Most likely any repatriation would take the form of a “deemed repatriation,” where 100% of offshore cash would be taxed at a rate around 8%. Additionally, any repatriation most likely comes with broader tax reform that could have implications to consider down the road. EVIDENCE In February we hosted Shane Lieberman, Director, Federal Affairs Manager in the US Office of Public Policy for UBS Americas (link).
Shane put the odds of repatriation at 50% with a Republican president. Given Republican control of the House, Senate, and Presidency, we maintain repatriation has at least a 50% chance of passing, likely as part of a broader tax bill. Both Trump and congressional Republicans have laid out repatriation proposals, with tax rates ranging from 3.5-10%. Repatriation last occurred in 2004 with a rate of 5.25%.