By all accounts, Apple Inc.'s bond issue is a raging success. Too bad: The success adds to the impression that the company is now in the business of cash distribution rather than growth.
Apple raised $17-billion (U.S.) on Tuesday, making it the largest non-bank corporate bond issue of all time.
It follows two other examples of record-breaking by Apple. It recently announced that it will buy back $60-billion worth of its own shares, making it the largest share buyback in history.
And when it reported its quarterly results last week, Apple announced a 15 per cent dividend hike. That brings the total payout to more than $11-billion a year, putting Apple on course as the world's biggest dividend payer.
This trio of records is impressive, but it is giving Apple a radically different profile in the market, one that is at odds with what investors had recently been signing up for: Dazzling gadgets that lead the competition.
Indeed, anyone who has watched Apple's share price wilt as much as 45 per cent from its record high in September (the shares are now down 37 per cent after recent gains) must be perplexed at the company's efforts to halt the slide.
Bonds, buybacks and bigger dividends will help Apple transition from a growth company to a cash-generating stalwart, but it is unclear how they will help restore excitement in the share price.
This isn't a criticism of the bond issue. In fact, the bonds make sense, even as they raise the nagging question of why a debt-free company sitting on $145-billion in cash (another record!) would need more of it.
Most of Apple's cash is parked offshore after being generated in overseas markets. Repatriating it to fund the dividends and buybacks would trigger a 26 per cent tax rate. But raising money through the debt market would mean paying an interest rate of just 2.25 per cent after factoring in a tax break on interest expense. That leaves more money to distribute to shareholders.
The bigger question is what the debt issue – and the cash-distribution plans that flow from it – will do for the share price.
Apple received at least $50-billion worth of orders for the bonds, far exceeding the supply. The strong demand has little to do with Apple's future, even if they are hailed as iBonds. It merely highlights the market's desperation for safe, income-generating products.
According to The Wall Street Journal, the bonds are expected to yield slightly more than comparable U.S. Treasuries – 0.8 percentage point more, in the case of Apple bonds maturing in 10 years. That's enough of a premium to make many investors salivate.
However, beyond funding Apple's plan to return $100-billion to shareholders by the end of 2015, the debt issue does not address a far more urgent need among investors: They want to see Apple unveil something spectacularly innovative to replace the fading cachet of the iPad and iPhone, whose market share and profit margins are threatened by rising competition.
Investors might take solace in Apple's return to the top of the corporate ranks, as the world's most valuable company based on market capitalization.
But there is one record Apple is going to have a hard time breaking: Its $705 share price in September. Right now, it serves as a reminder that the company's glory days are fading.