Apple (NASDAQ:AAPL) is going through some significant disruptions to its business as a result of the COVID-19 pandemic. Still, the Cupertino, Calif. company is faring better than most businesses that have lost a substantial amount of revenue during the outbreak.
The economic impacts that followed government actions to slow the spread of the virus has led to financial insecurity for many individuals. More than 40 million people have filed for unemployment benefits since the beginning of stay-at-home orders. Stimulus payments and other elements of the CARES Act that was signed into law on March 27 are helping, but are not the final answer.
Ultimately, there needs to be a health solution to a health problem. Encouraging reports on developments for a vaccine to neutralize the coronavirus have the public feeling cautiously optimistic that there will be a return to normalcy sometime at the beginning of next year.
Furthermore, the federal reserve has taken action to respond to the crisis by providing liquidity to the debt markets. Their efforts, along with a general flight to safe assets by investors, has caused interest rates to fall to record levels. That could be one reason why Apple borrowed billions to fund more share buybacks.
Apple adds more cash to its stockpile
On May 4, the company agreed to borrow $8.5 billion in four batches, which it can use for general corporate purposes, including repurchasing shares. Let's look at each one in a little more detail:
- $2 billion due three years from now in May 2023, carrying an interest rate of 0.75%.
- $2.25 billion due five years from now in May 2025, carrying an interest rate of 1.125%.
- $1.75 billion due ten years from now in May 2030, carrying an interest rate of 1.65%.
- $2.5 billion due 30 years from now in May 2050, carrying an interest rate of 2.65%.
The weighted average cost of the debt is 1.6%. Additionally, you may recall that businesses get a tax break on interest expenses, which brings the after-tax cost of debt to 1.25%. Indeed, that's a bargain price to pay for increased liquidity during what could be called one of the most challenging times in history. In contrast, Home Depot paid almost double the cost of debt for a similar bond issue.
What this means for investors
Apple already has over $83 billion of net cash and marketable securities on its balance sheet as of March 28. However, the company has a lofty existing share buyback program, with over $90 billion in repurchase authorization following an additional $50 billion that was authorized. In the second-quarter conference call, CFO Luca Maestri said: "We continue to believe there is great value in our stock."
The added money will allow Apple to continue investing in the company for both the short- and long-term. Furthermore, the low cost of the debt means there will be a lower hurdle to climb to add shareholder value. Finally, with a massive share buyback program in place, the tech giant has a ready place to put the funds to work.