Apple Talking With Investors About $15-16 Billion Bond Offering

[Avatar74]

As growth declines the debt ratio of a company increases. This is simple corporate finance.
The stock buyback program is the way to go. I never got it, why Apple started paying dividends.

Because the company is maturing.

Dividends attract the wrong kind of investor (stockholder).

Um, no they don't. The price of any asset is driven up by shrinkage in supply relative to demand. The more long term investors you have holding an asset, the more stable its growth will be relative to the company's growth in tangible operating value. That lower but more stable return is also buffered by a strong dividend in a company that has otherwise solid operating performance having plateaued from its growth phase.

I'll never understand why people would give up easy money for an uncertain chance at more money, since easy money snowballs... more money always comes with a hitch.

The thing about speculative growth is that bubbles always burst... then you get down to a gambling game of timing. Deleterious risk is something any serious investor wants to avoid.

You don't snowball a portfolio by taking one step forward, two steps back... every dollar of principal you risk for an unusually high return is a dollar plus years of future compounded returns you don't get back if you implode it.

Any number times zero is still zero.

Uh, I love corporate finance. This is the discipline where I "think different"
I am curious what's coming next.

This deal is very smart, because they have the operating cash flow to pay off what they're borrowing at a very low premium.... low enough that it's hugely offset by the returns on the foreign investments that, were they to cash them in, would cost them substantially more in accumulated foreign taxes than what the debt is going to cost them. And the debt has a fixed, predictable cost, unlike the unpredictable opportunity cost of selling off foreign investments.

So it's a no-brainer as far as I'm concerned. It's like my student loans I locked in at 3%. Why on earth would I ever use my accumulated investments to pay them off when at worst I see an 8% annual return on that pile of cash, and currently I'm seeing about 25%?

For someone who isn't very savvy with money, sure I can see that it might be a risk to hold debt at or above the risk free rate (30 year t-bill rate), but I'm a corporate finance guy.... I know a thing or two about business valuation.

 

[Ryth]

Ah, right. That makes a little more sense.

Again, at the risk of annoying you with an obvious question: why does Apple even need to do this in the first place? Wouldn't it be better to simply stay out of debt, push money into innovation and continue to bring out great products? The stock goes up and down; but Apple's declining stock isn't really in tandem with their profits or anything like that.

TL;DR: Why is it worth the risk? If Apple continue to be profitable as they have, won't the stock go back up again?

Sometimes taking on debt is better instead of just using the money you already have, you can use that money more wisely to get yourself a bigger return someplace else.

Example...taking a car loan...many could buy their $30k car outright, but some actually would rather borrow at 1-2% and use the $30K and invest that and make more money off of it. So instead of being out $30K and no debt, maybe you doubled your money with that $30k investment. Sure you borrowed a total of $33K (with interest), but you're up $27K now. Your money made you money while having debt.

 

[IJ Reilly]

If the US wants this practice to stop, they can lower the corporate tax rate.

The logic here is kind of inverted. The effective corporate tax rate in the U.S. is comparable to other countries. Unlike other countries, the U.S. tax code is larded up with tax avoidance opportunities. Congress has debated lowering the tax rate. The question is whether the loopholes are also eliminated, keeping it revenue neutral, more or less. Naturally corporate America wants their lower rate and their loopholes too.

 

[JayCee842]

As many others have said, many things can happen between bow and 2043. Especially in the technology industry.

Apple must be really confident otherwise they wouldn't be doing it. But who knows? We surely aren't any experts.

For now, I'll just sit back, enjoy these elegant products they make, and hope they don't mess it all up!

 

[IJ Reilly]

Sometimes taking on debt is better instead of just using the money you already have, you can use that money more wisely to get yourself a bigger return someplace else.

Example...taking a car loan...many could buy their $30k car outright, but some actually would rather borrow at 1-2% and use the $30K and invest that and make more money off of it. So instead of being out $30K and no debt, maybe you doubled your money with that $30k investment. Sure you borrowed a total of $33K (with interest), but you're up $27K now. Your money made you money while having debt.

Right idea, not a very good example. I don't think we're seeing consumer car loans at 1-2%. Below market rate car loans are subsidized by the manufacturers and are generally a tradeoff for rebates (aka, a lower price). Borrowing to buy a depreciating asset is not generally a good idea, unless you can't afford it any other way. Since your premise is someone who can afford it, the smarter consumer takes the lower price and pays cash.

 

[kjs862]

Why is Apple issuing bonds? I know they have a huge amount of cash in the bank, +120 billion now?

 

[osx11]

American tax laws at work.

A company with tens of billions in foreign assets in tax shelters needs to take on debt.

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Why is Apple issuing bonds? I know they have a huge amount of cash in the bank, +120 billion now?

it's mostly tied up in overseas assets, meaning that they would have to bring the money to the US and get taxed. They figure paying 1-3% on these debts is a lot better than paying 20-30% tax on their earnings if they bring it home.

 

[abhishake]

Ah, right. That makes a little more sense.

Again, at the risk of annoying you with an obvious question: why does Apple even need to do this in the first place? Wouldn't it be better to simply stay out of debt, push money into innovation and continue to bring out great products? The stock goes up and down; but Apple's declining stock isn't really in tandem with their profits or anything like that.

TL;DR: Why is it worth the risk? If Apple continue to be profitable as they have, won't the stock go back up again?

They really don't need to do this to be honest. Moody's downgraded them from AAA to AA after earnings because of this very reason. This is, however, a more efficient way of giving the money back. They'll still be able to have the cash they pay out on the balance sheet due to the money they get from the bond offering - this will allow them to push more money into innovation and pay a small percentage out as interest payments during the interim. Let me know if this makes sense.

 

[IJ Reilly]

Moody's downgraded them from AAA to AA after earnings because of this very reason.

If we've learned anything about financial markets over the last five years, it is that bond ratings from Moody's et al don't mean poop. They probably never really did. Apple is already way oversubscribed on the debt they will be selling, which means in fact they will be paying AAA-type returns, no matter what the rating companies say.

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it's mostly tied up in overseas assets, meaning that they would have to bring the money to the US and get taxed. They figure paying 1-3% on these debts is a lot better than paying 20-30% tax on their earnings if they bring it home.

Probably wouldn't be that much, since corporate tax rates abroad run in the neighborhood of 25%, and Apple gets full credit for foreign taxes paid. The net is not likely to exceed 10%, but that's still more than paying investors 2% for bonds.

 

[CJM]

Stock price is back up to what it was at the beginning of the month. I wonder if it'll continue to rise?

 

[kjs862]

American tax laws at work.

A company with tens of billions in foreign assets in tax shelters needs to take on debt.

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it's mostly tied up in overseas assets, meaning that they would have to bring the money to the US and get taxed. They figure paying 1-3% on these debts is a lot better than paying 20-30% tax on their earnings if they bring it home.

I see. I wonder what they plan on doing with all this money overseas then.

 

[iLog.Genius]

I see. I wonder what they plan on doing with all this money overseas then.

My guess is they would at least use some of that for overseas expansion. See: China Apple Stores.

 

[Bonte]

It makes me sick that one of America's most valuable companies is allowed to pull this crap instead of just paying taxes on earned income.

They earned it abroad and payed taxes abroad, i don't see the problem.

 

[AZREOSpecialist]

Why can't they support the American economy and pay.. ALL they taxes. bring the cash back to the USA

Why, so the CIA can keep lining Karzai's coffers with "multiple tens of millions of dollars" as our government has over the last ten years? Or to pay Congressional salaries to deadbeat politicians who should not have ever been elected? Or maybe we should use that extra tax money to fund those armed schools the NRA has been propagandizing about...

Really, nothing good can come of tax income until Washington gets its own house in order (by which I mean the various political factions need to get on the same page).

 

[MacDav]

Why can't they support the American economy and pay.. ALL they taxes. bring the cash back to the USA

So you believe throwing Billions into a Government sinkhole will help the American economy? Yeah, maybe all the Senators and Congressmen can give themselves another pay hike.

 

[Muscle Master]

So you believe throwing Billions into a Government sinkhole will help the American economy? Yeah, maybe all the Senators and Congressmen can give themselves another pay hike.

We have to right! ??

Fair is fair...

 

[PracticalMac]

Can you buy that over Scottrade?

Have my app fired up!

 

[MacDav]

We have to right! ??

Fair is fair...

Just like you and I, Apple has already paid their American taxes in full, and they have paid all foreign taxes in full. You want them to bring the money in foreign banks back to america and pay taxes on that money again? Why is that a good idea?

 

[thekev]

So you believe throwing Billions into a Government sinkhole will help the American economy? Yeah, maybe all the Senators and Congressmen can give themselves another pay hike.

The rest of us end up paying for it anyway. It should be consistent, and routing through several subsidiaries to where it eventually winds up in a tax haven country is not a real option for smaller businesses or most individuals.

 

[jlasoon]

Apple have something big up their sleeve to do this.

Yes, it's called a need for cash. They need cash right away and don't have it. It's as simple as that. We've seen companies such as US airways, Margin Stanley, Dish Network, JP morgan, Verisign, Rosetta, Microsoft, and Walmart, just to name a few announce a need for cash and issue bonds in the last few years. Don't know why everyone needs cash all of a sudden, but it can't be good.

 

[PracticalMac]

They are borrowing the money so they do not have to repatriate the overseas money. The bond yield is not bad either, and in the end it would have been the wiser choice for them to pay ~2.9% over the three years buying back a stock that has the potential to go back up to $700+

No one knows better about Apples future products and innovations than they do.

Think about it.

And, if disaster strikes they can still fall back on their foreign savings to pay the bonds, right?

Besides that, ~2.9% is really low interest as loans go (wish my mortgage was that low!)


A 3, even a 5 year bond seems to be a really good deal these days.


While I don't like debts, this really does seem like a win all around.

 

[jlasoon]

Can you buy that over Scottrade?

Have my app fired up!

You'd have to be insane to touch any of this.

30 year paper on a tech company yielding less than 4% lol. Did you miss the $500B fluctuation in market cap this past year?

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Just like you and I, Apple has already paid their American taxes in full, and they have paid all foreign taxes in full. You want them to bring the money in foreign banks back to america and pay taxes on that money again? Why is that a good idea?

Someone has to pay for Obama phones, Section 8 housing, Welfare Checks, EBT cards, Disability Insurance, Unemployment Insurance, and 80 other federally mandated welfare programs. Apple needs to pay their fair share. Stop being so anti-government, embrace change, and goose step forward comrade.

 

[MacDav]

The rest of us end up paying for it anyway. It should be consistent, and routing through several subsidiaries to where it eventually winds up in a tax haven country is not a real option for smaller businesses or most individuals.

"Should be" those famous last words. Who decides what should be? The country is split about 50/50 on what should be. What you think should be and what I think should be are two different things. I think I'm right and you think you're right. So who's really right? I am of course.

 

[liavman]

I wonder if these bonds can be used as a mechanism to effectively repatriate the funds without taxation. Fr example, if they are purchased by Apple's foreign entities or otherwise swapped Apple may get to us the funds in the US without paying the taxes until an amnesty or tax change occurs.

Interesting thinking. I have a feeling that Apple can not buy its own bonds. But they can definitely lend money to someone else to buy it. There can be such financial engineering things going on behind the scenes.
(like Apple's funds buying someone else's bonds who then turn around and buy Apple bonds )

But the real intention is for Apple to borrow in dollars from the public and use it to buy back the stock. Given the low interest rate they are getting and the low stock price at which they are going to buy the stock back, this is a huge win-win for Apple and Oppenheimer. Buy Apple stock in boatloads if one can afford it.

 

[JAT]

As an American company it sure is! I can't understand why it's possible for Apple or any other US corporation to use these loopholes to avoid paying taxes. I sure wish there was a magic loophole for me to avoid my taxes and maybe my student loans.

There is for the loans. Get a company to pay them.