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How Trump's Tax Policy Could Affect Large Companies Like Apple

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Trump hasn't officially released his proposed changes to tax policy yet but we pretty much know what to expect.

We know that we can count a reduction in the rate of tax that corporations pay. As recently as late January, in his meeting with executives from Johnson & Johnson (NYSE: JNJ), Dow Chemical Co (NYSE: DOW), Ford Motor Company (NYSE: F) and others, Trump indicated that he planned to have the rate of corporate tax reduced from 35 percent to "anywhere from 15 to 20 percent."

This is going to make life very easy for investors, many of whom will likely just buy the most profitable U.S. companies with the biggest balance sheets.

The second part of this reduction plan is the "Repatriation Holiday" that would allow companies to bring overseas cash back home without having to pay a significant amount of tax on it.

Both of these changes are going to benefit the biggest, strongest companies in the country.

In his Q4 letter to investors, hedge fund manager Davd Einhorn observed that the way to invest for Trump policies is to focus on companies that are currently paying a lot of income taxes.

The most profitable companies with a lot of overseas cash, like Apple Inc (NASDAQ: AAPL) are going to get a huge bump up in cash flow when that corporate tax rate drops from 35 to 15 percent. 

Here is what Einhorn said specifically about Apple in his recent investor letter:

"AAPL stands to benefit from repatriation of foreign cash and tax reform. The company has over $200 billion in offshore cash it could bring back to the U.S. AAPL also derives a majority of its earnings from foreign sources but still accrues GAAP taxes at a 25 percent rate, which is higher than many other large tech companies. The lower corporate tax rates proposed as part of repatriation and tax reform could therefore lead AAPL toward a structurally lower GAAP tax rate going forward."

If Apple's tax paid on repatriating that cash has just drops by 25 percent that means that the company should be worth $50 billion more than it was without the repatriation holiday. That is a $10 per share bump without the company having to do anything.

If Apple's annual tax rate also drops by 60 percent under a Trump corporate tax cut, that would reduce GAAP income tax expense from $15 billion last year to $4.8 billion. That is a $10 billion bump to earnings, which on a 10 multiple means a $100 billion increase to Apple's market capitalization. That is closer to $20 per share.

Add the two of them together and you could see a $30 per share bump in Apple's share price just from Trump's tax policies. 

 

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