Apple Dives Deeper Into Debt For Just One Reason
Apple was loaned $6.5 billion from investors through a bond sale earlier this week, just days after the company released an incredibly impressive earnings report. A company that's able to sell 75 million iPhones in a single quarter and make a profit of $18 billion doesn't seem like it would need to take on debt. The fact that it's sitting on close to $200 billion in cash is another sign of the company's lack of financial want.
Apple currently has about $34 billion worth of debt. That's not exactly worrying when the total value of the firm is taken into account, but it is a significant number to consider when valuing the company. CEO Tim Cook has been able to use that investment to grow in recent years, but the question remains: How did Cupertino get into a situation where it needs to borrow to invest in the future?
Why Is Apple Going Into Debt?
Apple is borrowing for one reason and one reason only. The company is giving huge amounts of money back to shareholders every single year through the payment of a dividend and, more importantly, share repurchasing.
Though Apple spends most of its money in the United States, it pulls in more internationally than it does on American soil. A repatriation tax that the company has been complaining about for years means it can't get that money back to the United States in order to pay for share repurchases and the like. With interest rates so low, Apple is currently paying about 3.5 percent annually for a 30-year debt.
Apple says its share repurchase program will return a total of $130 billion to its shareholders — a level it may not be able to meet with its U.S. holdings. Borrowing relieves that necessity and lets the company bring in a greater windfall should there be a better repatriation deal in place in the future. There are other tax benefits to taking on debt, but the lack of appetite for repatriation is the single most important factor.
What is certain is that Apple holds the majority of its cash outside of the United States and that the company would prefer to move a large part of it home, even at a significant tax loss. Whether a recent tax change volunteered by Barack Obama is good enough for Tim Cook remains to be seen.
Debt Prices Collapse All Over
The low price of borrowing that Apple is taking advantage of is affecting those borrowing from investors across the world. Countries across Europe currently have negative yields on some of their debt, meaning investors are actually paying to loan money to them.
Some companies, most notably Nestle, have actually seen this happen to their debt, and although that seems unlikely to happen at Cupertino, many are benefiting from ultra-low interest rates. Those prices may not be sustainable, however, and given the prominence of central banks in pricing debt, investors unused to the market should stay away.
Apple fans, however, shouldn't worry too much about the company's debt accumulation, at least not for now. While earnings continue to grow and the company's sales are strong, there's little enough harm in continuing to issue debt in order to buy shares. What is obviously terrible advice for an individual isn't always the same for companies, especially when it comes to companies that can afford accountants like Apple's.
Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted