Lower tax rate could lower the technology sector’s dependence on the debt market
Earlier in the series, we discussed the potential impact of Donald Trump’s presidency on technology players. After the announcement of the US presidential election’s outcome, which defied the pre-poll results, we saw a fall in the technology sector (QQQ).
Earlier in the series, we discussed Trump’s proposed plan for a reduction in the current tax structure. A lower income tax rate would provide technology companies with the flexibility to fund growth by investing in R&D (research and development) while adhering to their usual policies of returning cash to shareholders through stock buybacks and dividends. It goes without saying that spending on R&D drives success in innovation and breakthrough technologies.
The lower tax rate is also likely to curb companies’ propensity to resort to the debt market or issue more shares to raise cash. As the majority of technology companies gain their revenues from abroad, their cash reserves are also held abroad. Due to the majority of their cash being parked outside the United States, they have to resort to bond issuances to borrow for acquisitions, dividends, and buybacks.
This explains why, despite having significant cash, Apple (AAPL) raised $1.0 billion in Australian bonds (EWA) in June 2016. Oracle (ORCL) also made the news in late June 2016 with its biggest bond sale ever. For the same reason, despite having cash reserves of $136.9 billion, the majority of which were parked overseas, Microsoft (MSFT) resorted to debt to buy LinkedIn (LNKD).
Technology sector continued to be a top spender in buybacks
According to FactSet data, among the top ten companies that spent the most on share buybacks, four belonged to the technology sector. Apple, with its significant cash reserves, continued to spend the most, followed by Microsoft. Oracle was another technology company that made the top ten list.