Please ensure Javascript is enabled for purposes of website accessibility

Apple, Inc. Prepares for More Buybacks

By Adam Levine-Weinberg - Feb 20, 2016 at 12:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With interest rates remaining low, issuing debt to buy back stock is almost a no-brainer for Apple.

In the past few years, Apple (AAPL -0.14%) has issued more than $60 billion of debt to fund its dividends and share repurchases. This has allowed it to avoid paying repatriation taxes of up to 35% on its $200 billion foreign cash stockpile.

Apple just revealed its first big debt offering of 2016. Image source: The Motley Fool.

On the company's Q1 earnings call last month, Apple CFO Luca Maestri stated, "We also plan to be very active in the US and international debt markets in 2016, in order to fund our capital return activities." Apple made its first move in this direction in the past week.

Apple's first debt offering of 2016
Last Tuesday, Apple filed a prospectus to issue nine different series of dollar-denominated bonds. In total, Apple is issuing $12 billion of debt.

Of the new debt, $10.5 billion is being raised for "general corporate purposes" -- which means share buybacks, for all intents and purposes. However, Apple is also issuing $1.5 billion in "green bonds" that are earmarked for investments in energy efficiency, renewable energy, and similar initiatives.

As a practical matter, the distinction between Apple's green bonds and its debt raised for general corporate purposes is probably moot. Apple was going to spend money on environmentally friendly projects no matter what. Issuing green bonds will free up the cash it would have otherwise spent on these projects.

The price is right
For Apple, issuing debt to fund incremental share buybacks is almost a no-brainer right now. Despite its rising debt balance, Apple retains a very high credit rating, allowing it to issue debt at extremely low interest rates.

In fact, Apple typically saves money when issuing debt to buy back stock, because the added interest expense is more than offset by lower dividend payments. Apple priced its recent offering at an average interest rate of less than 3%. (Even its 30-year notes carry an interest rate of just 4.65%.) After the impact of tax savings, the effective interest rate will be less than 2%.

For comparison, Apple's dividend yield was 2.2%, based on its Thursday closing stock price of $96.26. Furthermore, Apple is likely to raise its dividend in April, increasing the amount of cash that it will save by buying back stock now.

Apple stock is cheap
Of course, it wouldn't make sense for Apple to spend money on share buybacks if its stock was overvalued. However, Apple stock is quite cheap, having fallen back below $100 last month.

AAPL Chart

Apple Stock Performance. Data by YCharts.

It's true that Apple's profit could decline on a year-over-year basis in fiscal 2016. However, the expected launch of a new 4-inch iPhone (the iPhone 5se) and an updated 9.7-inch iPad (the iPad Air 3) should keep any earnings decline manageable. Meanwhile, the stock now trades for less than 11 times the average analyst estimate for this year's earnings: far below the average earnings multiple for the stock market as a whole.

Most importantly, Apple is well positioned to return to solid profit growth next year. The iPhone 7 should ignite another strong upgrade cycle for Apple's signature product. Apple CEO Tim Cook also expects the iPad product line to make its long-awaited return to revenue growth later this year. Finally, a much-improved Apple Watch is likely to be ready for launch by this fall.

A return to stronger earnings results should lead to a revival in Apple's stock price. In the meantime, issuing debt at rock-bottom interest rates to buy back more stock will build value for long-term investors.

Adam Levine-Weinberg is long January 2017 $85 calls on Apple. The Motley Fool owns shares of and recommends 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.35 (-0.14%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.