By buying Apple bonds, the U.S. Federal Reserve is getting awfully close to backing Apple stock, Brian Chappatta writes for Bloomberg Opinion.
It doesn’t take much imagination to see the Federal Reserve supporting the stock price of Apple Inc… Its shares have easily rebounded from the selloff caused by the coronavirus pandemic, rallying 24% so far in 2020. Yes, Apple has about $100 billion of debt outstanding, but it’s also known for having one of the largest cash piles in the world. It’s so big, in fact, that the company could repay all its obligations and still have roughly $83 billion left over.
With so much cash, that naturally raises the question: Why does Apple take on debt in the first place? In each of Apple’s past three dollar-bond sales, in November 2017, September 2019 and May, the company said it would use proceeds at least in part to repurchase common stock and pay dividends under its program to return capital to shareholders…
The Fed didn’t have to loosely interpret the law to create this index of corporate debt. It was already following through on its pledge to buy exchange-traded funds and had a system in place for companies to become eligible for individual purchases. It chose this third route…
Now that it’s scooping up individual bonds issued for share buybacks without any stipulations, policy makers should be asked again why this program is the right way to go about supporting the recovery. The truth is likely that corporate America needs low-cost debt to survive. Apple and its shareholders are more than happy to tag along for the ride.
MacDailyNews Take: Apple takes on debt because the money is too cheap not to borrow. It is, as we’ve often written with Apple debt issuances, “free money.” Apple would be stupid – and a failure of their fiduciary duty to shareholders – not to take it and deploy it in whichever ways they see as best for the company and the shareholders who own it.
Read the full article to see how onerous rules for the central bank’s Primary Market Corporate Credit Facility are helping to fuel the current “bonds for buybacks” situation.