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Trump's Tax Policy May Make for Some Very Easy Investing

- By Christopher Malcolm

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

It is going to make life very easy for us as investors. We can just buy the most profitable U.S. companies with the biggest hoards of balance sheet cash and then relax.


We know that we can count on a reduction in the tax rate corporations pay. As recently as December Trump indicated that he planned to have the rate of corporate tax reduced from 35% to 15%.

Part two of the reduction in corporate taxes is the "repatriation holiday" that Trump wants 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 fourth-quarter letter, hedge fund manager David Einhorn observed that the way to invest for Trump policies is to focus on companies that are currently paying a lot of income taxes. It makes perfect sense.

The most profitable companies are going to get a huge bump up in cash flow when that corporate tax rate drops to 15%. What would be ideal then is to find companies that are both very profitable (paying a lot of income tax) and have a lot of overseas cash that the repatriation holiday can free up.

A company that fits that mold very well would be Apple (AAPL). Apple is a longtime position in Einhorn's fund and a very profitable company with a lot of overseas cash.

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

Apple 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. Apple also derives a majority of its earnings from foreign sources but still accrues GAAP taxes at a 25% 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 Apple toward a structurally lower GAAP tax rate going forward.

If Apple's tax paid on repatriating that cash just drops by 25% that means 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% 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 just 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. That is on a stock that is arguably attractively priced already.

Thank you for the idea, Mr. Einhorn. Thank you for making investing easy, Mr. Trump.

Disclosure: I don't own shares of any company mentioned in this article

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This article first appeared on GuruFocus.