How Apple’s massive debt-powered buybacks actually save the company money

“I’m a big fan of Apple’s strategy of financing its massive share repurchase program with debt,” Evan Niu reports for The Motley Fool. “Not only does the Mac maker avoid repatriation taxes while delivering earnings accretion, but the whole program also comes at no net cost to the company.”

“Apple’s interest and dividend income more than covers the interest expense,” Niu reports. “Plus, by swapping out expensive equity capital for cheaper debt capital, Apple is able to reduce its overall weighted average cost of capital, or WACC. But reducing WACC is more of an implicit cost of capital. There’s another way that Apple’s debt-powered repurchase program delivers explicit cost savings.”

“As Apple repurchases and retires shares at an astounding rate, it no longer has to pay out the dividends for those shares,” Niu reports. “That translates into considerable savings on dividend expenses over time, considering how many shares Apple is repurchasing. Let’s do the math.”

Read more in the full article here.

MacDailyNews Take: Free money, free money, free money!

SEE ALSO:
Why investors should love Apple’s debt strategy – August 21, 2015
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

17 Comments

  1. who cares? The stock market is one big manipulation party. Stock buybacks create the illusion that investing makes a level playing field.

    You’re better off at DraftKings.

    1. I’m not sure who said that (buybacks purportdly making a level playing field), but it has nothing to do with it.

      Stock buyback only reduces the number of outstanding shares, shifting the ownership of the company back into the company’s hands. The remaining outstanding public shares will be exposed to exactly the same market forces as they were before, only there will be fewer of them. The playing field will be as level as it always was; there are no artificial barriers of entry. Everyone with $130 (or more) can buy a share in Apple. Since the stock market is the ultimate in free and open market, the price of any given stock at any given time will always precisely reflect the ratio between supply and demand, which will always be driven by the market forces. No one person can ‘manipulate’ shares directly on the market; no one person decides the selling or buying price — market forces do.

      However, there are a few very influential people who, when they say or do something, affect decision making by many others. When Jim Cramer says something on his show, he can, as a consequence ‘manipulate’ some stocks, as some people will listen to what he says and trade based on that, which may nudge the stock in one direction or other. For AAPL to go in either direction, several billion (with a ‘B’) dollars worth of AAPL shares must trade hands in a short period of time. There is not a single one person or entity in the world willing to sacrifice several billion dollars of his/her capital in order to force such a move.

      Only people who don’t really know much about how the stock market moves talk about ‘manipulation’.

  2. No!

    Debt for a company is never good. Never good for individuals either. Wait, save up, then buy. (If you ever expect respect from the banking industry, save up then purchase, stop using those credit cards. Anyway… )

    Look it is very easy to pay less in taxes, make less money. You hear the rich tell you all the time taxes are to high, yet none of them would trade places with the poor or middle class so they could actually pay less in taxes. For some reason, a reduction in the amount of dollars they have and make interest on does not come to their mines as way to pay less in taxes. (have your cake and theirs too comes to mine, eat yours, save theirs)

    It is a dumb idea to borrow money to pay out money you have. The simple fact is those European countries need money, a government usually doesn’t sell items so the way to get money, taxes. They view it as the charge of selling products in their country, they provide open, safe, secure markets, patent protection, so they expect to be paid for access to their population. THEY WANT THEIR CUT, go figure. donald would just pay somebody off, the art of the donald.

    I would rather see companies making profit set up non-raidable pensions for their employees. This 401K crap is artificially raising the value of stocks. (a company trading at 10, 11, 12, …, times earnings, when does that ever make sense. the new math perhaps. why just 10 times why not 30 times, give me a break)

    1. Every economist will always tell you that debt is always much better than sitting on capital. The worst thing for your money to do is nothing (i.e. to sit there gathering dust). The fastest way for money to lose its value is to hold onto it. The best way to use capital is not just to invest the money you earned yesterday, but to invest the money you’re earning today, as well as to invest the money you will earn tomorrow. In other words, rather than sitting on money, spend everything you have, then borrow some more and spend that. Borrowing money to finance business expansion is economically the most efficient way to grow business. The math is quite simple.

      You have a small manufacturing plant, churning out 10,000 plastic garden chairs per week. You sell all 10,000 and if you could make 100,000 you could sell them all. Your revenues are healthy, you’re making some $100k per week, and after paying off your workforce, taxes and other expenditures, you still have very nice profit. However, if you could quickly expand your business, you could be generating ten times as much revenue, and even more profit. You have two choices:

      1. Continue to run factory at full tilt, producing 10,000 chairs per week, for the next five years, until you save enough money to invest into the expansion;

      2. Take out a loan, invest it into expansion right away, ramp up production to 100,000 per week in about six months, pay off that loan in two years.

      Which option is better?

      1. Now you understand the cycles in the economy. Instead of steady moderate growth, follow this plan, it’s what been done in the past. I’m not for these companies sitting on that money. ( Look just know there is be a down turn and you may be riding that wave down at age 40, 50. Companies don’t hire 40 and 50 year olds. Why you an old dog and it is hard to teach you a new trick. Offended. Me too! )

        This is why you put the money in the investors hands, they will invest in the next thing, perhaps another company, or spend it on goods and services. 80% in the right number to return to shareholders. All companies making profit, with shareholders, should return to those investors 80% of the profits per quarter.

        for example, why is hp worth 15 a share. when is the last time these guys have seen a profit, the 80’s.

        How about this as an incentive, any company that makes profits 15 times the value of there collective stock price will pay nothing in taxes and the investor dividends will not be taxed either. Let’s add to that any company not profitable will pay 10 times their CEO’s compensation package in taxes. So… Make MONEY or get out of Business, you are wasting capital.

      2. Thank god In and Out Burger didn’t follow your debt plan for expansion, but Carl’s Jr did and Carl lost his company because of it. Going into debt isn’t good if you don’t have to, Amazon and Netflix are in debt in everything they do.

        1. I don’t know who is Carl’s Jr, and how he lost his company, but it certainly wasn’t because he went into debt. More than likely it was because he took on too much debt (which he couldn’t repay), or his business model wasn’t sound.

          I’m not sure Amazon or Netflix are arguing your point, though; they are quite successful and Wall Street seems to love them.

          1. The MBA’s (Wall Street) told him you can go nationwide don’t worry, in time Karl Karcher lost control of his company he was rolled by the money men. In and Out Burger gets that pitch over and over again from Banker’s.

            1. Well, clearly he made a mistake of trusting the wrong people for advice; that has nothing to do with taking on debt in order to expand business.

              The concept of borrowing to invest in expansion is still sound as it always was.

  3. Sorry, your premise is incorrect. Some debt is good. Do you have a mortgage? That’s a good debt. Do you have a car loan? If it’s 3 or 4 years, that’s an OK debt. Unless you happen to be maxed out on your credit cards and living beyond your means, of course. If you have a 5 or 6 year car loan, that’s a stupid debt. A college loan is a good debt *if* you stay within your ability to repay and choose a major where the economic prospects are good (e.g. software engineering, health care). A college loan is stupid debt if you’re going $125K into debt for an art history or philosophy major. Debt is a tool, and it can be used wisely or foolishly.

    As far as most corporate debt, I’m not a fan – as it is rarely spent or used wisely. In AAPL’s case, **they make money doing this**. Read the Motley Fool article, particularly the fourth paragraph of the section labeled “Retiring dividend expenses”. Apple’s debt is fixed rate, so inflation only makes this better and better, too.

    So, in truth, the dumb move from a financial perspective as well as the interest of the shareholders is to *not* engage in this debt offering. Do you have a no-risk alternative to offer that does not incur a 40% tax hit on repatriated earnings? Hint: there isn’t one.

      1. That’s overly simplistic. I have several thousand shares of AAPL I could have sold years ago and used to pay off my mortgage. I would have no debt but no AAPL shares. And it would have been the stupidest financial move of my lifetime. Instead, I chose to keep my 4% 30-year mortgage which I pay off on a 15-year schedule and held my AAPL shares.

        The result? My net worth now (assets-liabilities) is several hundred thousand dollars **more** than if I had followed the debt-free policy you espouse.

        In addition, my AAPL dividends (before taxes, alas) cover about 75% of my mortgage payments.

        1. JimBob no, not quite. Had you paid off you house, I will use your plan of 15 years, now, barring illness, job loss, down turn in apples share price, new cars, you would still have the value, equity, of your home, plus you would have had a 15 year pay raise of whatever your mortgage is per month.
          Now, I’m sure you realize that for 15 years you could have use that pay raise to buy apple stock or bank it, or find some other investments.
          You have done the other calculation, your down payment + 15 X 12 X monthly payment… after doing the calculation you must have reasoned that your house will be worth that amount in 15 years. hmm.

          If Donax is overly simplistic, why pay the house off early?

          not you, but: $250,000 home cost, 30 year mortgage, 700K… 600K… spent after 30 years… you will probably never make that money back in value off the house. (you won’t be able to sell it for what you spent out in the house over the years, probably)
          With the pay it off plan, using those shares, if anything unforeseen where to happen, that was not good, your house is paid for, you have a roof over your family’s head.
          Let’s just say, 2500 X 15 X 12 = $450,000 + let’s say the house increased in value 150,000 dollars in 15 years, that’s 600,000 dollars. This is not you of course, just an example.
          You do know the risk to investing right? You could end up with nothing. I think that’s several hundred thousand dollar there in the pay it off plan, $600,000. And the added security of a roof over your head no matter what the economy does, or apple’s share price.

  4. Just one word: TC fallacy of buying shares and paying dividends has hurt the stock, hurt the image of Apple as a company, it is a total waste whether done with own money or borrowed funds.

    1. That premise has no support in any evidence. Simple common sense would dictate that, without the aggressive buybacks and dividends, the stock would have gone much further down. Whatever the reasons for AAPL’s poor performance, without the buybacks, it would have only been much worse. Anyone with even just a week’s worth of experience in stock market can tell you that.

  5. I agree that given the current tax situation this is probably the best option for Apple.
    Apple still has the debt and it is a big one. It will be interesting if they are paying any of the principal or just paying interest at the moment. I would be happier if they are saving money and paying off the debt at the same time.
    Also tax payers are effectively paying a portion of the interest that is tax deductible. Part of any tax reform will need to cut out this type of deduction whilst rationalizing overseas revenue.

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