Hiding from the tax man, and what I like about Check Point

Investors want to minimise or defer tax payments for higher returns. This can happen at the personal investor level and at the company’s level …

As a German private investor I have to pay considerable taxes on realized capital gains when I sell stocks and on capital income like dividends. I have an annual tax exempt amount of €801, as a German I want to be precise here (it is not eight hundred Euros but 801!, double if you are married). Beyond this amount, I have to pay taxes. Deferring tax payments on the personal level can make a big difference over time, since the money you don’t pay as taxes can continue to compound.

  • this is an argument for companies that do not pay out (high) dividends but reinvest (most of) their capital at favorable terms (compounders)

Companies can also minimise their income tax payable and hiding their (real) profits, i.e. by investing in growth. Regarding the above, they can choose to repurchase their own stock (at attractive prices) instead of paying dividends to shareholders, and thus defferring tax payments (many of the hugely successful CEOs from The Outsiders did this). Further, companies with more than enough cash and a healthy financial poistion can choose to depreciate their assets aggressivly, reducing earnings before tax, and thus lowering their payable tax charge. Other companies might not be able to do that because they need to show a ‘strong’ balance sheet to lenders /banks.

Financially strong companies are often even stronger than they apppear, weak companies often weaker weaker.

Check Point (CHKP US) usually benefits from advantageous tax treatments due to its technology focus and R&D expenses and it sports a cash conversion comfortably above one (~1.3x). CHKP sits on a cash pile of about $4bn and uses its cashflow predominantly for buying back its own shares for $325m per quarter, effectively giving cash back to its shareholders without triggering tax payments for them (if they choose to hold, I do). Future earnings are further compressed to a lower number of shares outstanding, thus remaining shareholders have a higher claim on future (growing) earnings. On the negative side

  • CHKP misses opportunities to invest its excess cash

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