It may not be as exciting as the latest and greatest iPhone, but Apple's (AAPL 1.27%) latest offering is still something that investors should appreciate: bonds.Last week, Apple raised an additional $6.5 billion in capital through a bond offering to kick off 2015. This is the fourth debt offering in recent years.
There are several reasons why Apple's continued pursuit of debt is great for investors.
Domestic cash is king
At the end of 2014, Apple was carrying $32.5 billion in long-term debt on its balance sheet, a sequential increase of $3.5 billion following the company's first international debt offering. Apple issued 2.8 billion euros worth of bonds in November in order to diversify its debt investor base. Following Monday's debt offering, Apple's total long-term debt should now be around $39 billion.
Debt issuances don't immediately affect a company's net cash position, so Apple's net cash should still be around $149 billion. However, Apple is bolstering its domestic cash position with the issuance, because the primary purpose of most of its debt offerings has been to avoid repatriation taxes.
Source: SEC filings. Fiscal quarters shown.
At the end of last quarter, $20.1 billion of Apple's cash was held domestically, a modest sequential increase considering the phenomenal quarter it just reported. But Apple did repurchase $5 billion in stock during the quarter, which comes out of its domestic cash.
Apple has let its domestic cash fall to about $18 billion on two separate occasions in recent quarters before adding to its coffers with debt offerings. The company is seemingly too close to that point again, which could be the lower limit of its comfort zone.
But at what cost?
As with Apple's other bond issuances in recent years, the most recent offering similarly helps lower Apple's weighted average cost of capital, or WACC. Since debt capital costs less than equity capital, financing an equity buyback program with debt effectively reduces Apple's WACC. As Apple progressively adds debt to its capital structure, the company and its investors benefit in the form of lower costs of capital.
Of course, the cost of debt is more explicit in the form of interest expense, while the cost of equity is more abstract as the returns that shareholders require.
Apple is also taking advantage of a very favorable interest-rate environment right now, and the vast majority of the latest offering comes in the form of fixed-rate notes. For instance, the 30-year bonds that Apple just issued pay a 3.45% coupon, quite a bit lower than the 30-year bonds that Apple issued in 2013 at a 3.85% coupon.
The interest that Apple pays is negligible, unlike some debt-laden companies where interest expense gobbles up a fair portion of operating income. In fact, interest and dividend income from Apple's investment portfolio more than covers the cost.
|
Other Income and Expenses |
Amount (MRQ) |
|---|---|
|
Interest and dividend income |
$654 million |
|
Interest expense |
($131 million) |
|
Other expense, net |
($353 million) |
|
Total |
$170 million |
Source: 10-Q. MRQ = most recent quarter.
Additionally, Apple entered the commercial paper market last summer for the first time ever, tapping another source of short-term funding for liquidity needs.
It's the time of the season
Perhaps most importantly, the latest bond offering is yet another sign that Apple is preparing for the impending update to its capital-return program. CFO Luca Maestri confirmed on the last call that investors can expect an update alongside the next earnings release in April.
Before taking into account domestic operating cash flow this quarter, Apple should now have close to $27 billion stateside. That's a solid cash position that positions Apple for yet another boost in its capital-return program.
