Yesterday, Apple (AAPL +0.06%) tapped the debt markets for the first time in its history. The bold move comes as part of the company's ambitious capital return program, where it plans to return $100 billion in cash to shareholders through 2015.
Now that the bond offering has been completed, investors can sift through the figures to contemplate how much that paper will cost the iPhone maker from here on out.
|
Type |
Due |
Principal |
Yield |
|---|---|---|---|
|
3-year fixed |
May 2016 |
$1.5 billion |
0.51% |
|
3-year floating |
May 2016 |
$1 billion |
0.33% |
|
5-year fixed |
May 2018 |
$4 billion |
1.08% |
|
5-year floating |
May 2018 |
$2 billion |
0.53% |
|
10-year fixed |
May 2023 |
$5.5 billion |
2.42% |
|
30-year fixed |
May 2043 |
$3 billion |
3.88% |
|
|
Total |
$17 billion |
1.85%* |
Source: SEC filings. *Weighted average.
The floaters are tied to three-month LIBOR, which is currently around 0.28%, and will reset quarterly. The three-year floaters carry a 5 basis point spread relative to that benchmark, while the five-year floaters offer 25 basis points above it.
That 1.85% weighted average cost of debt that Apple is facing is far less than the cost of equity it's implicitly on the hook for right now. That also translates into a little over $300 million in annual interest expense, which shouldn't hurt the bottom line much since Apple's net income over the past year has been nearly $40 billion. When including the tax deduction, Apple's after-tax interest expense is more like $195 million -- chump change for the Mac maker.
It seems appropriate to revisit some of the recent calculations I've made now that we have finalized digits. Using the capital asset pricing model, I now peg Apple's cost of equity at 8.9%. Before yesterday, Apple's weighted average cost of capital, or WACC, was exactly its cost of equity since it was debt free.
Apple's market cap has increased since I last addressed this, and now sits at $415 billion. Adding in the $17 billion in debt and using the above rates, Apple's WACC is now 8.6%. That's just a 30 basis point reduction in the company's WACC, which is in line with the relatively modest amount of debt Apple raised relative to what it could have offered. The order book for Apple bonds reportedly reached as high as $50 billion, so it could have easily raised more if it wanted to, which would have further reduced its WACC.
That's not to say that $17 billion is a paltry amount. In fact, it represents the largest non-financial corporate bond offering ever. Good thing it came cheap.
