Many major multinationals like Coca-Cola (NYSE: KO) hold cash overseas to avoid having overseas profits taxed at the higher U.S. rates. The idea of the proposal is that allowing companies to bring cash back from overseas at a lower tax rate will lead to more hiring and business spending.
Trump’s pro-economy policies may give these companies the ability to finally use these huge cash hoards on research and development and investing in growth.
Trump outlined a tax proposal in April that would drop the tax rate on bringing offshore cash back to the U.S. from the usual 35% to 10%.
Companies like Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT), with over 90% of cash on the balance sheet “trapped” overseas, could get a big payday if they repatriate cash.
The idea of reducing the cash repatriation tax rate is to boost business investment. We saw a similar tax holiday in 2004. Most of that repatriated cash went toward share buybacks and acquisitions, which meant more cash in shareholders’ pockets.
Here are the top three picks . . . cash repatriation stocks that will be huge benefactors of a change in tax policy:
Cisco Systems (NASDAQ: CSCO)
Cisco has a $68 billion cash hoard and 95% of it is overseas. The Cisco balance sheet is top-notch, as it has over 40% of its market cap covered by cash on the balance sheet. That gives Cisco plenty of leeway to work up a business model shift, such as moving away hardware and toward higher-margin cloud services.
Cisco’s next-generation routing business is young and growing. It targets service providers, broadcasters and media companies with cloud and virtualization offerings. This shift to this next-gen routing is also key for the company. Cisco has the opportunity to shift to a model of recurring revenues and subscriptions. This higher-margin business should boost free cash flow and help Cisco stick to its commitment of returning cash to shareholders.
Speaking of returning cash to shareholders, Cisco has managed to increase its annual dividend payment every year for six straight years. It is now paying a 3.6% dividend yield that is just a 50% payout of earnings. It’s among the cash repatriation stocks to watch.
Gilead Sciences (NASDAQ: GILD)
Gilead Sciences has $34 billion in cash, with 86% overseas. Some 15% of its market cap is covered by cash on the balance sheet. But the stock has still been a gross underperformer recently. Shares of Gilead are down more than 17% in the last year. But trading at 9 times earnings, it’s one of the cheapest biotech stocks around.
The weakness in shares reflects Gilead’s Hepatitis C business is in decline and the fact that the company is sitting on a large cash pile without making any strategic acquisitions. But there are positives, which includes Gilead’s growing sales of drugs outside of Hepatitis C arena. Those sales are expected to grow by over 15% this year. Gilead’s pipeline of developing drugs includes five products in phase 3 trials. Many of these are used for treating Nonalcoholic Fatty Liver Disease, a disease that’s said to represent a $40 billion market by 2025.
Gilead is also taking the 50% fall in shares since 2015 as an opportunity to buy back its own stock. Gilead bought back $11 billion in stock during 2016, or 12% of its current market cap. Gilead hasn’t been paying a dividend for long at all; it started in 2015. Still, its dividend yield is already a healthy 3.1%. And it’s still paying out just 25% of its earnings via dividends.
Oracle (NASDAQ: ORCL)
Oracle has 88% of its $59 billion in cash overseas. Nearly 30% of its market cap is covered by the cash that’s trapped overseas. Couple this with the fact that Oracle is having massive success in the cloud business, and it could be an under-the-radar shareholder-returns story.
Oracle has been a resounding success when it comes to shifting its business. Its shares are now up 20% in 2017. But there’s still plenty of upside from a continued shift to the cloud. Oracle’s recent earnings report provided a solid beat on the top and bottom lines; it has managed to shift away from software and licensing to grow its cloud business revenues by 69% last quarter. Oracle’s margins are also rising. Margins have grown nearly 100 basis points as cloud revenues become a bigger part of the business. Cloud margins grew from 54% to 65% last quarter.
Oracle is an underrated dividend payer, with a 1.6% dividend yield. The tech company has increased its annual dividend for five straight years and still pays out just 30% of its earnings via dividends.
Trump’s promise to boost the U.S. economy and his preliminary talks on a lowered cash-repatriation rate could lead bonanza for big companies with lots of cash overseas. If Trump follows through, it could be a cash boon for the three cash repatriation stocks above and their investors.