Companies have an insane amount of cash parked overseas.
In 2014, Credit Suisse estimated that the amount of money US companies had overseas peaked at $US2.1 trillion, up from about $US500 billion in 2005.
But according to the firm, companies are starting to scale back on how much cash they park abroad and are considering bring more and more of it back to the US.
From Credit Suisse:
“Why the slowdown? Maybe companies needed to repatriate some of the funds back to the U.S. to buyback stock or pay dividends (e.g., our estimate of the domestic dividend payout ratio for the Health Care sector is more than 100%) or they are finding it harder to defend the claim that the earnings are “indefinitely reinvested” overseas (especially when its “reinvested” in a pile of cash). We estimate that amounts repatriated or earmarked for
repatriation hit $US301 billion in 2014 the highest level since the repatriation holiday in 2005.”
Back in 2005, the American Jobs Creation Act that Congress passed allowed companies to bring foreign profits home at a reduced tax rate. It was intended to encourage firms to use cash earned abroad to create jobs and grow the American economy.
Since then, un-repatriated earnings have ballooned, as the chart below shows.
Credit Suisse estimates that earnings S&P 500 companies kept abroad peaked at $US2.1 trillion in 2014, the highest since the act of Congress was enacted in 2005.
In President Obama’s budget speech last month, he proposed a one-time 14% tax on earnings abroad.
And via Credit Suisse, here’s why you should be concerned about all the cash that’s parked abroad:
- The money is probably abroad to avoid US taxes, so it will stay there for a while, giving companies less flexibility than they appear to have. And that means there’s a difference between the cash amount on balance sheets and the cash that companies intend to return to shareholders, pay debt with, or use for acquisitions.
- When the off-balance sheet tax liability on earnings overseas is factored in, a company’s books become weaker than they appear.
- “Earnings quality concerns, if companies need the cash in the U.S. to return to shareholders or to support the domestic business that could call into question the sustainability of the tax rate. In addition, if the foreign profits are being converted into restricted cash, does that change your view on earnings quality?”
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