Apple (AAPL) sells $ 14 billion in bonds

Apple Inc. (AAPL) sold $ 14 billion in bonds in early February 2021, tapping the debt markets for the third time since May 2020 in an apparent attempt to continue to profit from historically low borrowing rates. The debt supply has been divided into six maturities, ranging from 5 to 40 years. Apple said in the prospectus that the proceeds would be used for general corporate purposes, such as share buybacks and dividend payments, as well as funding working capital, capital expenditures, acquisitions and repayments of existing debt.

Apple’s existing treasury

To put the size of Apple’s recent bond issues into perspective, 93% of non-financial companies in the S&P 500 already have less than $ 14 billion in debt on their balance sheets.Meanwhile, Apple had $ 36 billion in cash and cash equivalents on its balance sheet as of Dec.31, 2020, plus nearly $ 160 billion in marketable securities that should be easily convertible to cash.

Apple is a powerful cash generator, reporting a record operating cash flow of $ 38.76 billion in its first quarter of fiscal 2021, the quarter ending December 31, 2020. Luca Maestri, chief financial officer of Apple, stated that “we will maintain our goal of achieving a net cash neutral position over time.”

As a result, Apple returned $ 28.39 billion to shareholders through share buybacks and dividends in the first quarter of fiscal 2021, an increase of 17.1% over the same period of the year. ‘last year.

Importance for investors

Against this backdrop of strong cash generation from operations that far exceeds current returns on capital to shareholders, as well as a huge combined treasure trove of $ 196 billion in cash and marketable securities, the logic of the bond issue eludes some observers. Skeptics note that the yield on newly issued five-year bonds, 0.7%, exceeds the dividend yield on Apple stock, 0.6%.

So using these bond issues to buy back stocks actually seems more expensive, at first glance, than simply tapping into existing cash reserves. However, since the interest expense is tax deductible, the after-tax cost of this borrowing should be less than the dividend yield on the stock, so maybe it could actually make economic sense.

Either way, Apple’s main motivation for issuing these bonds may well be an attempt to block financing at low rates while the company can. As Barron’s notes: “The most important factor for Apple might be that long-term Treasury yields should continue to rise, so the company might want to borrow for decades at low cost while it is still possible. . The bonds were sold with coupons between 0.7% (for the 5-year note) and 2.8% (for the 40-year bond). “