AAPL Issuing Corporate Bonds to Fund Dividend Increases

Apple: Borrower Analysis

The size of the loan that Apple (AAPL) is procuring is $6.5 billion dollars in corporate bonds (Colt, 2015) with the intention of raising another $1.6 billion through the sale of Australian currency bonds in the form of seven-year notes (Purvis, 2015). The intention of the loan is to lift share holder value through the increase of dividend payments while avoiding hefty tax payments by repatriating its stockpile of cash ($145 billion to be exact) held in offshore accounts (Ehrman, 2013).

Thus, this transaction is useful to Apple because it allows the company to maintain its significant cash reserves and to boost its stock price by giving investors greater incentive to buy. Some critics might argue that the loan does nothing to really boost the company's fundamentals (in terms of development projects) but in an age where fundamentals are increasingly insignificant (which is what happens when QE to infinity becomes the mantra of Wall Street rather than proper P/E ratios), investing in a company because it has solid fundamentals loses some of its appeal. Apple is doing what every other major firm is doing the world over -- keeping shareholders interested in holding a stock that is at all-time historic highs in a market that looks to be teetering on the edge of collapse. This loan is not about adding value to the company: it is about making sure the stock remains relevant to both retail buyers (as well as hedge funds) and big investors like the Swiss National Bank, which is a major holder of AAPL shares and a continual buyer.

The impact of this loan to both lenders and the borrower can be synthesized in the following manner: purchasers of Apple seven-year notes will benefit from the positive yield from the investment. As negative interest rate policies (NIRP) abound across the global market (Europe, Japan, and now the U.S. discussing it as a possibility), a positive yield is attractive to investors and from a company that is cash-rich and poised at the top of the technology market (as Apple is), the lender can be impacted via portfolio and via a risk-reward ratio. Should Apple's stock increase, as it has in the past, the lender is set to benefit substantially. Should the stock decline once the impact of China's crashing economy is fully considered by the market, the lender may lose out -- especially if Apple continues to issue new debt with higher and higher yields in order to attract investors fleeing the world of NIRP. If the original buyers of notes for this discussed here attempt to sell their bonds down the road, they will be competing against new issuances that are more appealing to buyers because of the higher yield. In order to be attractive, the original bond holder will have to sell at a lower price, thus losing on the transaction. Should the lender instead choose to hold the seven-year note to the full allotment of time, there is the risk of Apple's credit being downgraded (it currently holds the "second-highest credit ratings at both Standard & Poor's and Moody's") (Purvis, 2015). While analysts may view a downgrade as unlikely (a downgrade would surely impact both stock and bond prices), the fact remains that sales of Apple products are dependent upon a market that is poised to pull back considerably in the coming years, especially as peak consumer mobile tech is felt and competitors provide adequate supply to meet demand. Apple's market share may not meet the criteria demanded by lenders looking to capitalize on a sure thing.

The impact of this loan on the borrower is that it is able to secure in the short-term a surge in shareholder value and avoid a high tax on the repatriation of its funds at the same time. Even as a legislators attempt to pass a bill that would make it easier for companies with large overseas holdings to bring cash back to the U.S., Apple is still at the mercy of a tax policy that essentially requires companies to borrow in order to reward shareholders so as to avoid being taxed at too high a rate for moving funds from one account to another. Should Apple's credit stay strong in the coming years, the impact is low-risk; however, should a collapse in retail volume coincide with a Federal Reserve policy that obliges investors to assume the worst (i.e., no more QE), Apple's intention of bolstering its already high P/E may prove short-sighted. If retailers pull away from Apple in an attempt to save in other ways, this loan could be a misstep in financial allocation. In other words, it may be time for the firm to reassess its cash rich position and begin using its reserves to finance one of several options that may appear at this time, such as share buybacks, R&D, or dividend increases.