The U.S. Federal Reserve is getting awfully close to backing Apple stock

By buying Apple bonds, the U.S. Federal Reserve is getting awfully close to backing Apple stock, Brian Chappatta writes for Bloomberg Opinion.

Apple buybacks since 2018

Brian Chappatta 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.

6 Comments

  1. Moronic article by a Bloomberg columnist. The Fed has announced a plan to buy corporate bonds in order to support the market. Naturally, their input would be large, and so they are likely to be buying the bonds of some of the largest bond issuers. One of those is Apple, so it stands to reason that the Fed might buy some Apple bonds. Of course, Apple doesn’t need the Fed to buy its bonds, and hopefully, they won’t; and will actually buy bonds of companies that need the help.

  2. I disagree. Taking on debt always has a cost. It mosr]t definitely isn’t, “free” as the boys at MDN state here. Debt is money that is out of reach. It can’t be used for anything. It continues to cost the company money, where’s money that is invested at least has a chance of sustaining its value. What could Apple have done with the $180 billion, or so, it threw away making those buybacks? It’s now paid out several billion in interest for those loans, make no mistake about that. I would instead prefer to see a reasonable amount of interest. There is no excuse for interest to linger around the 1% mark.

    1. The idea is that Apple’s credit rating is so good it could borrow at interest rates lower than the inflation rate. So even though it pays some interest on the debt, it pays back the debt with cheaper, inflated dollars.

  3. Only Wall Street and your Banker likes more debt for a fat fee. Being good for you doesn’t matter and taking it (debt on when you don’t need to is never good).

  4. This is more than curious. As if Apple needs the support!

    Apple holds a very significant portion of the S & P, which means it’s part of A LOT of insurance company investments, mutual and public pension funds. All have been Covid-challenged and with Lockdown-2 brewing and continued financial turbulence on the horizon, could this $$ support & diffuse Apple’s own headwinds, therefore a significant piece of the overall market, and portend a drop in AAPL price, IF bond-buying didn’t happen?

    The market LOVES the Fed’s $$ infusion and market has climbed to it’s highest perch in over 20 years…as a result. This has occurred without a correlation in earnings. It’s an election year. Debt just doesn’t matter anymore.

    The Fed = The Market’s Viagra.

    1. The amt. of increasing deficit spending and the total debt does NOT matter ever since the Marshall Plan, WWII, Viet Nam War, Korean War, Middle Eastern wars, Wall St. bailouts and the big spy budgets, all of which produced negligible inflation; It’s only McConnell’s fake worry by way of Offsets and Pelosi’s PayGo that austerity hawks worry about who is going to pay for Single Payer. In all these cases, the Federal Reserve simply creates the money via a ledger entry. Simple.

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