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Apple has announced that it will be buying back $100 billion of stock in the coming year, and many people are concerned with the impact that this can have on the economy at large.
Apple is using the tax reform bill, including provisions that lower corporate tax rates and offer the ability to repatriate income into the United States at lower tax rates, to buy back shares in their own stock and to increase their corporate earnings. Many people were banking on the tax reform bill of 2017 to increase employment and wages in the United States, thereby increasing the overall economy as a whole. Alternatively, people were hoping that companies would reinvest in their business and grow their operations, furthering the economy in this way.
Luca Maestri, the CFO of Apple, indicated that Apple shares are undervalued and that the company is buying back shares for that reason, not because it doesn’t see the ability to invest in its operations. Maestri indicated that Apple has sufficient cash stores to handle both a buyback and investments in the business. Apple, under CEO Steve Jobs, accumulated large cash stores that only started to be paid out to investors after he passed away and relinquished the job to CEO Tim Cook.
Apple kept significant stores of cash in offshore accounts and financed its stock dividends and buybacks with borrowings in the United States as a way of avoiding the high income tax rates in the United States. The tax reform plan allowed Apple to have more room to maneuver around tax laws and avoid higher income taxes.
A study by UBS has indicated that capital expenditures by companies, which are defined as investments in capital equipment and the business, are up almost 40% in 2018 from the 2017 year. Buybacks are up by over 15% and dividends are up over 10% from the prior year. These are positive signs for businesses but do not include the recently announced capital plans from Apple.
Further, wages have been increasing as a result of a tight employment market with limited amounts of unemployment and greater competition for employees. Still, the long-term impact of the tax law changes will not be fully understood for years to come and will be impacted by macro and micro conditions at each company.
Apple is in some hot water not just with their customers, but now even with the United States government over actions that they have admitted to taking to slow down older versions of the iPhone product that they produce.
Whenever a new iPhone was released to the market, some customers started to notice that their version of the phone started to slow down or otherwise act abnormally. Customers started to cry foul, but some wondered if it was all just in their heads. Was it really possible that one of the largest companies in the world was slowing down their beloved handheld device? It did seem a little farfetched at first. However, Apple did finally come out and admit that yes in fact they had been tinkering with the older iPhones. They even went so far as to offer an apology of sorts.
CNBC is now reporting that the government has taken steps to probe the situation with Apple and slowing down their phones. The Department of Justice is currently looking into what exactly happened with this situation. It is still early days in the investigation, and there is no telling what might come out of it. Anything from a warning to a hefty fine are possibilities.
Apple has responded to all of the attention that it has received as a result of this dust-up by offering a new software update to be released in the Spring. That new update would give iPhone users more control over their phones and the battery life that they use up. Apple still contends that what it was doing was for the betterment of the older iPhone models that are out there. They also say that while they are going to offer the option to turn off the process of having the phone slowed down automatically, they do not recommend that users choose this option.
The Justice Department and the Securities and Exchange Commission were both not commenting on the story as it involves an open investigation. Apple has lowered the cost of getting an updated battery for the iPhone 6 model down from $79 to $29 in response to all of the criticism that they have been enduring. How the rest of this story works itself out is still yet to be seen.