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Some companies don't pay dividends. Some companies accumulate money like the offshore "exiled" or expatriated cash piles of the likes of Apple and friends. So I suppose that corporate profits can be accumulated as well as subsequently invested into operational infrastructure or spent on supplies or wages. But then is the money classified as something other than profits? Aside from these scenarios, what else can happen to corporate profits, and what are they?

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If a company earns $1 Million in net profit (let's say all cash, which is not entirely realistic), it can do one of three things with it:

  • Invest it back in the company (by buying more assets to generate future profits or paying off debt to reduce interest expense)
  • Distribute it to shareholders (dividends, stock buyback)
  • Do nothing (keep it as cash)

On the balance sheet - profits that have not been distributed show up as "retained earnings". When dividends are paid, Retained Earnings and cash are reduced. None of the other options change the fact that it is still "profit" - they all just affect the balance sheet, not the income statement:

  • Investing cash by buying assets trades one asset for another (no revenue/expense)
  • Investing cash by paying off debt decreases assets and liabilities (no revenue/expense)
  • Distributing cash to shareholders by buying stock or paying dividends decreases assets and equity (no revenue/expense)

Note that when a company issues dividends, it reduces its per-share value since cash is leaving the door with nothing in return.

In Apple's case, since a significant amount of its profit was earned in other countries (where it was not taxed by the US), it would pay a significant amount in US corporate tax by bringing it back to the US by investing it or paying dividends. They are betting that at some point, the US will change the rules to make it more favorable to "repatriate" the money and reduce their tax significantly.

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  • I think the question is, at what point does revenue become profit to be taxed, as opposed to money spent on a deductible expense like salary. (My uninformed guess is that it is related to quarterly filings.) – chepner Sep 28 '17 at 14:26
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    @chepner Revenue is taxed in the year it is earned, regardless of when it is paid out as dividends. Expenses are deducted from tax in the year they are spent. The issue here is that a company like Apple pays local taxes in foreign countries for revenue earned in a given year; they do not pay US taxes on those profits until the money is brought to the US. – Grade 'Eh' Bacon Sep 28 '17 at 14:37
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    Specifically in the case of Apple, they have a subsidiary called Braeburn Capital that is tasked with managing the company's cash and short-term investments. In 2016, they were reported to have $220 billion in assets under management, leading some to call it "the world's biggest hedge fund." – Jason R Sep 28 '17 at 14:56
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    Or they could reverse merge (buy a non-US company, move headquarters to there, and repatriate profits via dividends on a non-US exchange) even if the current law doesn't change. – Yakk Sep 28 '17 at 15:18
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    @jpaugh HQ doesn't have to be where you operate. Why move back? For a recent high profile example, Burger King. It is now based in Canada, as well as popeye's and a number of other chains. – Yakk Sep 29 '17 at 11:54
3

Apart from investing in their own infrastructure, profits can be spent purchasing other companies, (Mergers and Acquisitions) investing in other securities, and frankly whatever they please.

The idea here is that publicly traded companies have a fiduciary duty to their shareholders to make as much money as they can with the resources (including cash, but including so much more than that) available to the company.

It happens that the majority of huge companies eventually stopped growing and figured out that they weren't good at making money outside their core discipline and started giving the money back through dividends, but that norm has been eroded by tech companies that have figured out how to keep growing and driving up share prices even after they become giants.

Shareholders will pressure management to issue dividends if share prices don't keep going up, but until the growth slows down, most investors hang on and don't rock the boat.

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  • Microsoft started paying dividends in 2004, roughly 25 years after they were founded. That seems like a plausible period to wait for the current batch of internet companies to do the same. – GS - Apologise to Monica Sep 28 '17 at 20:59
  • @GaneshSittampalam I thought about mentioning the Microsoft example, but the Apple example seems to be a counterpoint to it. Either way, my last paragraph covers the idea that dividends are from a company with slower growth and reliable revenue. I may update it to make that more clear. – NL - Apologize to Monica Sep 28 '17 at 21:16
  • Apple do pay dividends, and also did for a while back in their "first" incarnation. I imagine it's quite common for US companies to keep profits overseas rather than repatriating them and increasing dividends though. – GS - Apologise to Monica Sep 28 '17 at 21:39
  • Yes, the Apple dividend should be much larger based on its cash pile. That will probably change if the coming tax reform makes repatriating the money easier. – NL - Apologize to Monica Sep 28 '17 at 21:48
1

Where can publicly traded profits go but to shareholders via dividends?

They can be retained by the company.

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