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International Cash

August 14, 2013

Diversification, overseas, international operations – these are all terms that have come to have more and more importance over the last 15-20 years as globalization has evolved. Many of the largest firms that are traded on U.S. exchanges earn a significant percentage of their revenue from their international operations. Some, like Caterpillar, have made the news lately because their large exposure to foreign markets has crimped their earnings. This makes sense – no matter which way you slice it, the vast majority of people in the world do not live in the United States.

Overseas markets have more customers, and more customers = more revenue.

None of this is rocket science, or new information, but what does this mean for you, the firms your follow, and your money?

There has been a lot of chatter about the value of dividends and buybacks in the financial media lately; in a low interest rate environment, investors are looking to get their returns however they can. Dividends and buybacks both have positives and negatives, but that analysis is for a different article. What I want to focus on is how these are paid for. Easy, dividends and buybacks both cost money, cold hard cash. So again, what is the point?

The point is this: tax laws state that if a firm wants to bring back, or repatriate, their overseas earnings back to the United States they must pay taxes on it first, and shockingly, most executives do not want to pay these taxes. So what ends up happening is that the cash that is earned overseas stays overseas, and cannot be used for dividends and/or buybacks. This can complicate your analysis, for instance, if you want to look at the firms cash levels in order to judge its ability to raise its dividend or continue its buyback program.

This is an important fact to remember when you hear people say that a firm has “X” billions in cash on its balance sheet. The more important question should be, how much of that cash is available to be used for investors in the form of dividends and buyback? You can usually figure out/find how much of the firms cash balance is kept in the US and overseas, and so you can perform your own evaluation as to whether or not the firm can actually afford its dividend/buyback plan.

As always, it is necessary to dig past the headline number, and get into the details.

Happy Reading!

http://www.stlouisfed.org/publications/re/articles/?id=2314
http://blogs.wsj.com/cfo/2012/05/17/at-big-u-s-companies-60-of-cash-sits-offshore-j-p-morgan/
http://economix.blogs.nytimes.com/2013/02/12/the-growing-corporate-cash-hoard/?_r=0
http://www.bloomberg.com/news/2013-03-08/offshore-cash-hoard-expands-by-183-billion-at-companies.html
http://online.wsj.com/article/SB10001424127887324085304579010971386703480.html

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