Does Apple Need a Loan for Billions?

While investors have been clamoring for the return of a portion of Apple's (NASDAQ: AAPL  ) $145 billion of cash, it appears that the company is planning on issuing debt to fund this repayment. If you're scratching your head, wondering why the most cash-rich company on the planet would be taking out a loan, there's a good reason. U.S. tax law makes a loan the smarter play for the company and for shareholders.

The new capital plan
When Apple announced its most recent operating results, it also rolled out a new capital plan that's a first foray into addressing the outcry for more money in shareholders' hands. The company earns a scant 1% on its cash investments, leading many to conclude that the capital should be returned. The "use it or lose it" attitude is largely prompted by the shareholder suit earlier this year that focused on this very issue.

Under the new capital plan, the company will increase the dividend by 15% to $3.05 per share, beginning with the May 16 payment. In addition, the company said it will increase its stock buyback plan from $10 billion to $60 billion by the end of 2015. The total plan is expected to put about $100 billion back into the hands of investors in the next two and a half years. Piper Jaffray's Gene Munster called the plan a beginning, saying: "They want it all today. They want it faster."

So why is Apple borrowing the money?
To fund a portion of the stock repurchase plan, Apple will issue debt to cover the cost. While it seems unthinkable to borrow money to return to investors rather than tapping the huge cash stockpile on the company's books, stringent U.S. tax policy is to blame. The U.S. carries a corporate tax rate of roughly 35%, making it one of the highest in the world. More than 65% of Apple's cash is held overseas, meaning that the tax bill of repatriating that much capital would be significant.

Rather than take the tax hit, the company will borrow the money it needs to return cash to investors. If you're now thinking it's absurd that making a company issue debt to more effectively move cash back onshore, which will have the net effect of a tax-free offset, be thankful that the company is choosing to be conscientious. A structure by which companies are penalized for bringing money home, or forcing them to resort to accounting ploys, might explain why so many have moved operations overseas in the first place.

After Cisco's (NASDAQ: CSCO  ) last earnings call, CEO John Chambers said that as long as U.S. tax policy forced money to remain abroad, he would manage his company's cash to the benefit of shareholders. He pushed for tax reform in his comments but refused to alter company policy to serve short-term needs. Apple faces the same issue and is responding similarly.

While the new capital plan may not fully address the desires of some shareholders, it goes a long way to putting cash back into the hands of investors. With the heightened dividend and attractive valuation, the stock is cheap and deserves an allocation. Apple doesn't need a loan, but it's taking one to satisfy the best interests of its shareholders.

There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (7) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2013, at 5:37 PM, techy46 wrote:

    Apple's now paying 3% dividends on stock and can borrow billions at 2% so why not borrow to buy back stock and make 1% along the way. In fact, yhey should borrow a $100 billion and buy at 30% of the stock and pay off the debt over 3 years.

  • Report this Comment On April 27, 2013, at 5:40 PM, Jjkiam wrote:

    Yes Apple has now shown it not only cares about shareholders but that they believe the stock is incredibly cheap and will be a powerful buy side competitor to all the shorts! What happens when they also show the market that they aren't sitting around with their hands up their butts and announce their next wave of innovation? Can't wait to see how the WWDC unveils the direction of IOS and OSX to fuel the ecosystem in new opportunities

  • Report this Comment On April 27, 2013, at 5:44 PM, Rusty56 wrote:

    Dreamers

  • Report this Comment On April 27, 2013, at 7:35 PM, HenTor wrote:

    Apple should put $30Bn into an account with Citibank in Europe, and then use that as collateral to borrow $20Bn from Citibank in the U.S. Cit would charge them 0.5% or less. That's the cheapest way to get their hands on some of the overseas money for domestic use.

  • Report this Comment On April 27, 2013, at 9:44 PM, Tsinky wrote:

    No corporation with halfway-decent tax attorneys pays the full 35 percent corporate tax. That's a bogus argument that corporations use to bargain for a tax cut.

  • Report this Comment On April 28, 2013, at 1:00 AM, kenbestcali wrote:

    Time for Apple to be American. Nah, just kidding.

    Apple will remain a Chinese company, it does not

    intend to pay tax here, but still want the free roads,

    hospitals, schools, airports ... in Bay Area.

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