Why investors should love Apple’s debt strategy

“Over the past few years, the richest company in the world has continued borrowing increasing amounts of money from all over the world,” Evan Niu writes for The Motley Fool. “Apple’s debt position has ballooned considerably ever since it launched its capital return program in 2012. Including commercial paper and long-term debt (current and noncurrent), Apple had an incredible $54 billion in debt at the end of the second quarter, a figure that’s been steadily rising over the years.”

“The Mac maker sold $2 billion in its first sterling-denominated bond offering in July, then proceeded to sell another $2 billion in so-called “Kangaroo” bonds in Australia as it continues to diversify its credit investor base,” Niu writes. “There are many benefits of this debt strategy… Apple gets to avoid repatriation taxes since it doesn’t need to tap foreign reserves, which now consist of nearly 90% of total cash. It gets to fund its share repurchase program, driving significant earnings accretion. Heck, Apple even gets to lower its weighted average cost of capital, or WACC, by essentially swapping out equity capital for debt capital.”

Niu writes, “Yet here’s another reason why investors should love the company’s debt strategy: all that debt comes at no net cost.”

Read more in the full article here.

MacDailyNews Take: Free money, free money, free money.

And certainly smarter than blowing it on U.S. corporate taxes which are far too high.

Under the current U.S. corporate tax system, it would be very expensive to repatriate that cash. Unfortunately, the tax code has not kept up with the digital age. The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free flow of capital… Apple has always believed in the simple, not the complex. You can see it in our products and the way we conduct ourselves. It is in this spirit that we recommend a dramatic simplification of the corporate tax code. This reform should be revenue neutral, eliminate all corporate tax expenditures, lower corporate income tax rates and implement a reasonable tax on foreign earnings that allows the free flow of capital back to the U.S. We make this recommendation with our eyes wide open, realizing this would likely increase Apple’s U.S. taxes. But we strongly believe such comprehensive reform would be fair to all taxpayers, would keep America globally competitive and would promote U.S. economic growth.Apple CEO Tim Cook, May 21, 2013

Apple plans record Kangaroo bond debut – August 20, 2015
Apple preps first Kangaroo bond; likely to set Australian corporate bond record – August 17, 2015
Apple’s samurai bond pushes debt to $45.5 billion – June 3, 2015
Apple set to issue $1.6 billion of yen-denominated bonds – May 27, 2015
Why Apple is selling bonds in Switzerland – February 10, 2015
Apple plans debut Swiss franc bond sale; looks to exploit Switzerland’s low interest rates – February 9, 2015
Apple preserves overseas cash hoard, raises $6.5 billion from bond sale funding share buybacks – February 4, 2015
Apple plans $5 billion bond sale; fourth since 2013 – February 3, 2015
Orders pour in for Apple’s $12 billion bond offering – April 30, 2014
Apple debt offering only $12 billion – April 29, 2014
Apple about to join the ranks of the biggest U.S. corporate debtors – April 29, 2014
Apple readies blockbuster $17 billion debt sale – April 28, 2014
Apple plans another massive debt sale to fuel new share repurchases, dividends – April 25, 2014


    1. You are right, you do change who you pay but there is a positive tax/dividend effect by doing it this way.

      The interest Apple pays is tax deductible for only the duration of the bond offering.

      By retiring the shares, Apple avoids paying the dividend on those shares FOREVER. In addition the dividend payment is after tax which means that Apple saves more than the dividend price.

    2. The policy is a one-sided BET that Apple will ultimately be able to repatriate $5/share on a one-time basis (26% of cumulative overseas earnings) following an expected change in the tax code. The one-sided bet is financed at a very low interest rate. The debt-financed bet does not interfere with company operations, R&D, dividends or share buybacks.

      What’s not to like?

      With no possibility of loss, the annual cost of the bet is about 2% of the potential payoff. The size of the bet increases rapidly over time, as Apple expands faster in foreign markets than in the USA.

      1. Yes, this is the sad state of things right now. Essentially monetary policy is encouraging consumption, and punishing prudence.

        They want consumers to be indebted to the system, and not masters of it.

        The common wisdom is that it’s inadvisable to be in debt and there is “some” truth in that. You are trading financial gain for monetary freedom. Even if you can make more money than you’re paying in debt, you still are shackled, to some extent, to the bank. Additionally, cheap money fuels higher prices as people who SHOULD NOT be purchasing a house are able to borrow more money to do so.

    1. I have to keep telling myself they know what they’re doing. They know their company better than anyone else. However, so far the results make it hard to tell if they’re geniuses or idiots. I’m looking at Apple long-term but Apple needs to do something to get investors that stick with the company instead of dumping shares every time they hear some dubious rumor.

      Of all the tech stocks on the market, Apple is being hit the hardest even though everyone says Apple’s P/E is low. Does it really make sense to dump the low P/E stocks and keep the high P/E ones? It wouldn’t seem so but I’m the one looking kind of stupid for thinking Apple should be solid as a rock instead of being a wet noodle. At least I’m getting my dividends every quarter, so I can’t complain too much.

  1. Essentially it is all about paying less taxes, which any company should try to do within reason.
    Trading short-term advantages from long term debt does not sit with me well. My feeling is that it will come back and bite Apple at some point. The only saving grace is that the overseas war-chest is so large. If Apple needed the cash they could get it when they want but have to take the tax penalty.

  2. If Apple left the cash in foreign banks it wouldn’t pay taxes either.

    With the stock repurchases, the value of that cash has diminished by the drop in AAPL’s stock price.

    Apple bought high, now may need to sell low to pay the debt.

  3. How many shares can Apple repurchase?
    Assuming the average purchase price for Apple shares over the next five years is about $150, up 28% from where shares are trading today, total share count could be reduced from about 5.7 billion today to 4.2 billion in five years, or by 26%. In other words, Apple’s earnings per share could realistically grow about 5% annually over the next five years from repurchases alone — not bad for a market leader trading at just 13.5 times earnings.

  4. When corporate taxes were high in approx. the 1950s, the economy boomed. Now that the corporate government reduced taxes to approx 20%, the economy is weak. Where did the tax slackers’ money, and the nation’s wealth, go? Into offshore accts. of hoarding companies and overly-rich individuals.

    1. The U.S. economy boomed in the 1950s because every other industrial country in the world had had its economy destroyed (Germany, e.g.) or was operating under crushing war debt (the UK, e.g.) The U.S. was the only game in town. It is specious reasoning in the extreme to equate boom times with high taxes.

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