Apple's profits would jump by 16% under President Trump's proposed tax reforms, Citi says

Apple’s profits might be boosted by 16% if President Trump’s proposed tax reforms are enacted, according to an analysis by Citi.

Trump’s tax reform plans include reducing the corporate tax rate from 35% to 15% in the US, and applying a tax of only 10% to the profits of US companies that want to repatriate cash being held overseas. Currently, taxes on foreign profits are deferred until the money is moved back to the US.

Under Trump’s proposals, repatriating the cash at a one-time 10% tax rate would be more profitable than paying the 15% domestic rate. And it would avoid a recurring annual charge of 10% on future foreign profits.

The proposals would make it likely that Apple would move its foreign cash back to the US in order to pay the least amount of tax. In the most recent quarter, Apple said it was holding $US246 billion in cash, of which $US230 billion was held in foreign subsidiaries.

Citi analysts Jim Suva and Asiya Merchant say they would expect Apple to use the cash to increase its stock buyback program, adding 10% to EPS. The lowered domestic tax rate would also improve earnings per share by 6%:

… we see Apple as a significant beneficiary of Trump tax reforms. Apple is very well positioned to benefit from potential tax reform of either or both a repatriation tax holiday and or a lower corporate tax rate. Our analysis show a reduction in US tax rate will drive 6% benefit to EPS while a cash repatriation holiday and share buyback could drive an incremental 10% EPS benefit (assuming 25% of repatriated cash used for stock buy back).

They believe Apple will update its “capital return” program on the next earnings call:

We expect Apple to provide an update to their Capital Returns program, especially in the light of a potential tax reform benefit from reduction in corporate taxes and cash repatriation. With domestic FCF generation at ~$US20bln and net cash at $US158 bln (up slightly y/y in December), AAPL should announce an increase to their annual shareholder return policy during their quarterly earnings call. We currently model capital returns authorised to increase to ~$US300 bln (from ~$US250 bln currently) with a dividend increase of 10%.

Here’s a chart:

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