D is for debt -- or at least, it was for Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). On Tuesday, the company sold $2 billion worth of 10-year notes priced at the Treasury yield plus 68 basis points. In a private deal, it's reported that the issued debt would yield 1.998% at par value.
According to Bloomberg, the proceeds will be used to pay off short-term debt, increasing the duration of these liabilities to take advantage of historically low interest rates. An article from Bloomberg notes how popular debt issuance has become recently for major tech companies; they have combined to sell approximately $103 billion in bonds this year alone.
Compared to Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) -- the latter of sold nearly $20 billion of bonds the day before Alphabet's debt placement -- the search giant has been outright parsimonious. So why hasn't Alphabet more enthusiastically joined in this debt fest?
Alphabet: Tech's Ebenezer Scrooge
The most obvious reason Alphabet hasn't joined Apple and Microsoft in taking on debt is that the company has been stingier about returning cash to shareholders. According to their last three year's worth annual reports, Apple and Microsoft have returned $103 billion and $37.7 billion to shareholders in buybacks alone over that period alone. Alphabet, on the other hand, announced its first wide-scale share buyback for a relatively paltry $5 billion in late 2015. Unlike Apple and Microsoft, Alphabet does not pay dividends to common shareholders.
The chart below details total cash return -- both dividends and share repurchases -- for Microsoft, Apple, and Alphabet over the last three fiscal years.
|Company||Fiscal Year T||Fiscal Year T-1||Fiscal Year T-2||Sum|
|Apple||$46.814 billion||$56.126 billion||$33.424 billion||$136.364 billion|
|Microsoft||$26.975 billion||$24.325 billion||$16.195 billion||$67.495 billion|
|Alphabet||$1.780 billion||$0||$0||$1.780 billion|
It should be noted that both Microsoft and Apple technically generate enough money from operations (more on this later) to support their dividends and share buybacks. However, both increased their debt levels over this period. Net debt issuance, excluding short-term commercial paper, rose at Microsoft and Apple by approximately $27 billion and $55 billion, respectively.
An additional reason why Alphabet does not have to borrow cash has to do with the country's arcane taxation rules. The United States uses a worldwide taxation system, which means it taxes domiciled companies on their worldwide income.
However, the IRS levies that tax when the profit is returned to the United States. Foreign profits remain tax deferred until repatriation takes place, which is why many companies decide to leave profits stashed offshore. Unfortunately for shareholders, however, unrepatriated funds cannot be used to pay dividends or for share buybacks.
Microsoft and Apple are extreme examples of companies with a high percentage of cash that's currently sitting in foreign accounts. Microsoft recently reported that $108.9 billion -- 96% of its $113.2 billion in total cash and cash equivalents -- was foreign held, and subject to repatriation taxes. Apple, in its latest financial report, disclosed that 93% of its $231.5 billion was held in foreign subsidiaries.
The remaining domestic cash is insufficient to fund the cash return at levels both have rendered in years past. In the absence of domestically held cash or enough cash from domestic operations to fund these ambitious dividend and buyback programs, Microsoft and Apple have turned to the debt markets.
On the other hand, Alphabet holds approximately 60% of its cash domestically. If Alphabet decides to increase its stock buyback authorization, it has plenty of accessible cash and a relatively low-debt balance sheet versus its big technology peers. In my opinion, the option for it to engage in an aggressive buyback program is one reason Alphabet should continue to trade at premium valuations.