NEW YORK (TheStreet) -- Companies have been repatriating earnings in order to boost revenue, as in the case of Lululemon (LULU), to increase available U.S. cash as in the case of eBay (EBAY), or to smooth over the costs of restructuring as in the case of Staples (SPLS) -- but shareholders rarely see a benefit.
Repatriation is a necessary evil for all companies that sell goods or services outside the U.S. The word simply describes converting a foreign currency into the national currency. The amount received depends on the exchange rate at settlement time and, accordingly, there is an exchange risk there, but the risk to investors is even greater because it provides a way for multinational companies to play a shell game.
Roughly 362 companies in the Fortune 500 maintain tax haven subsidiaries, according to the Citizens for Tax Justice in its "Offshore Shell Games 2014" report published June 2014. "Only 55 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if these profits were not officially booked offshore," says the CTJ. "All told, these 55 companies would collectively owe $147.5 billion in additional federal taxes."
Tax avoidance, or to put it nicely "minimization," is nothing new. In 2010, Bloomberg called out several drugmakers for finding ways to avoid paying taxes and both Apple (AAPL) and Starbucks (SBUX) are currently under investigation by the EU for their respective tax structures. Such government scrutiny is obviously necessary, and poses a risk to investors.
Repatriation can also be a way for a company to afford activities that make it look like it is doing well, even if it isn't. Take eBay for instance.
The company took a $3 billion tax charge in order to repatriate $6 billion in foreign earnings and will use part of that money to execute its $5 billion share buyback program.
Does that mean eBay is a buy? Absolutely not. Taxes were a huge hit to net income for last quarter, its share price has fallen 14% over the past three months, and David Dorman, one of its own directors, doesn't own a single share in the company. Not very encouraging.
Repatriation can also be a way to cover up losses, as we can see looking at Lululemon.