With $147 billion of cash on their balance sheet, why is Apple adding debt by going into the commercial paper market for the first time since 1997?
Apple will issue approximately $10 billion of CP ostensibly to manage the mismatch of cash overseas vs the US to manage the $90 billion share buyback (increased from $60 billion) and 8% dividend increase. Indeed US interest rates are attractive for taking on debt. Nevertheless Moody’s characterized the tactic as “very unusual” among U.S. nonfinancial issuers, “despite Apple’s uncommonly large cash holdings.” Last year, Apple placed $17 billion across six long-term debt issues, which at the time was the largest bond offering on record (subsequently supplanted by Verizon’s $49 billion last September), and which marked the first-ever material debt load on the company’s balance sheet.
Apple maintains significant excess of cash ($41.4 billion at the end of March) relative to the current $17 billion of debt. It also retains substantial offshore cash holdings ($111 Billion), and cannot repatriate under current tax policies. Apple’s $176 billion of revenue over the last year (through March 2014) translated to nearly $47 billion of cash flow, after accounting for capital expenditures.
Apple bought back $44 billion of its shares and paid out $11 billion in dividends over the 12 months through March, up from less than $2 billion and $7.5 billion, respectively, over the year-earlier period. Apple’s incremental debt will back a material increase in its shareholder-return target through 2015 to $130 billion, from $100 billion.
The question investors should be asking generally is if the US economy is on a sustainable recovery trajectory, why are US companies continuing to use cash for dividend hikes and share repurchase programs versus capex?
Given Apple’s core business iPhone and iPads (76.5% of business) are under competitive pressure, is financial engineering the best use of $130 billion of cash? Acquisitions seem to be a better place to gain access to new markets, add additional geographic presence or fight competition. Again this seems to be a move by a value oriented equity versus a growth technology company seeking to re-invest in innovation and competitive positioning.