Apple’s new $12-billion (U.S.) debt issue is more iBond 1S than iBond 2. The iPhone maker is selling bonds for the second year, even though it has $151-billion of cash. The 2014-model debt issue’s main improvement on last year’s debut may be its smaller size.
Though it doesn’t on the face of it need the money, it’s logical for Apple to borrow. Domestic earnings aren’t sufficient to cover the company’s hefty dividend – $11-billion last year – and its plans to buy back $90-billion of stock within a few years. And like other U.S. companies making lots of money overseas, particularly in the technology and pharmaceutical sectors, repatriating cash would mean handing a slice of it to the Internal Revenue Service.
Happily for chief executive officer Tim Cook, interest is tax-deductible. Combined with low market interest rates, debt is a very efficient source of funds for big returns of capital to shareholders – especially with bond investors eager to lend vast sums to giant companies like Apple, IBM and Microsoft while expecting only slim returns in excess of government bond yields.
Apple’s debut large-scale offering, a $17-billion effort a year ago, was timed to perfection. Part of it was 30-year debt yielding just 3.88 per cent. Investors still snapped up the bonds. Tech debt is relatively scarce, so Apple’s paper offered diversification. The issue’s size also meant the bonds would be liquid.
Last year’s 30-year notes now trade at under 90 cents per dollar of face value. To be fair that’s entirely because Treasury yields have increased. But it’s still a reminder how much a small change in yields can dent a long-term investment. Even so, investors were happy to give Apple another shot. The company’s newest offering, which like last year’s came in a range of maturities up to 30 years, attracted plenty of interest at spreads that are roughly the same as last time.
About the only thing investors have gained is that this year’s offering is smaller – an incremental improvement rather than anything radical, just as with Apple’s gadgets of late. Despite a very comforting balance sheet, though, tech life cycles can be brutally short. Certainly it’s hard to see Apple’s credit improving much or rates going down in the medium term. That suggests Apple’s new bonds are unlikely to reward investors any better than its last batch.
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