Apple Is Raising Lots of Debt, and That's a Good Thing

Apple's mountain of cash is doing little other than rotting on the books. With so much of its cash held overseas, Apple will benefit shareholders by selling bonds to fund its huge buybacks and dividend payments.

May 1, 2014 at 12:30PM

In the post-2008 financial world, debt is universally associated with evil. One of the most commonly utilized means to analyze companies is to inspect balance sheets to make sure they don't have a burdensome amount of debt on the books. This obviously makes a great deal of sense, since there are indeed plenty of companies that take on too much debt and are worse off later on.

Technology giant Apple (NASDAQ:AAPL) isn't one of those companies, however. It's taken on a lot of debt in a series of sales that began last year, but it's the right move. Apple is set to offer billions more in debt, which may have you worried about the company's financial strength going forward. However, in Apple's case, there's very little to worry about. In fact, the move to issue debt will come as a benefit to both the company and its investors, and is the right strategy for management to take.

Sterling balance sheet isn't currently benefiting shareholders
By now, most people know that Apple has a ton of cash, $150 billion in cash and marketable securities to be exact, which is a very good thing. But, what you might not know is that Apple is getting almost no credit for its cash hoard, which isn't such a good thing. That's because Apple's valuation remains at a significant discount to both the broader stock market and its peer group, even with such an impressive cash balance.

This is true even following its run-up after posting strong earnings, in which the company reported nearly 5% revenue growth and double-digit earnings growth. Still, Apple trades for just 13 times forward earnings estimates, while the broader market holds a forward multiple close to 20 times earnings. After stripping out its huge cash pile, the result is even more striking. Apple's valuation based on its enterprise value, which incorporates a company's cash hoard while deducting its net debt, is even cheaper. Using this measure, Apple trades for an enterprise value to EBITDA ratio of just 8 times.

It's time to monetize
Apple clearly needs to do something with its cash pile for the benefit of shareholders because the market is giving the company no multiple premium for it. In this situation, companies often turn to huge acquisitions. Apple does indeed acquire companies, several of them per year. But, management has indicated little desire to go on an empire-building spending spree just for the sake of making news. That may prove to be a shrewd move since there are abundant examples of companies overspending on acquisitions only to have to write down those assets later.

Instead, Apple is investing in research and development, buying back stock, and raising its dividend. Those latter two points should be emphasized. Apple recently announced it would expand its total capital allocation program by $30 billion, to $130 billion, which will be delivered via buybacks and dividends. Since a lot of Apple's cash is held overseas, due to the fact that two-thirds of the company's revenue is derived internationally, Apple would incur a significant tax liability if it chose to repatriate that cash. That's where bond sales come into play.

Last year, Apple sold $17 billion worth of bonds, which represented the second-largest offering ever. This time, Apple will sell $12 billion of debt. While $29 billion in debt seems like a worrisome amount, it's pocket change for Apple. Plus, Apple is such a profitable company and is in such a fantastic financial position that the cost of this debt is a pittance. Apple holds a AA+ credit rating from Standard and Poor's, which is its second-highest possible rating. As a result, Apple's varying maturities included 10-year fixed rate notes that were priced just 77 basis points over comparable U.S. Treasuries.

The bottom line
It's easy to worry about a company taking on tens of billions of dollars in debt. After all, one of the harsh lessons learned in the financial crisis is that debt has the power to bring an entire economy to the brink of collapse. However, it's also possible for a company to utilize debt to its advantage, and that's what Apple is doing.

It became clear that the market wasn't going to give Apple a premium valuation for its cash pile since that cash was earning almost nothing for shareholders. By issuing extremely low-cost debt to fund its dividend increases and share buybacks, Apple is providing an instant return to shareholders. That's why you shouldn't be at all concerned about Apple's bond sales.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information