Apple (AAPL) Sells $14B of Bonds

Apple Inc. (AAPL) has sold $14 billion of bonds at the start of February 2021, tapping the debt markets for the third time since May 2020 in an apparent attempt to continue taking advantage of historically low borrowing rates. The debt offering was divided into six maturities, ranging from 5 to 40 years. Apple indicated in the prospectus that the proceeds would be used for general corporate purposes, such as share repurchases and dividend payments, as well as funding working capital, capital expenditures, acquisitions, and repayments of existing debt. 

Apple's Existing Cash Hoard

To put the size of Apple's recent bond issuance in perspective, 93% of the non-financial companies in the S&P 500 Index have less than $14 billion of debt already on their balance sheets. Meanwhile, Apple had $36 billion of cash and cash equivalents on its balance sheet as of Dec. 31, 2020, plus nearly $160 billion of marketable securities that should be easily convertible into cash.

Apple is a strong generator of cash, reporting record operating cash flow of $38.76 billion in the first quarter of its fiscal year 2021, the quarter ending Dec. 31, 2020. Luca Maestri, Apple's chief financial officer (CFO), indicated that "we maintain our target of reaching a net cash neutral position over time."

Accordingly, Apple returned $28.39 billion to shareholders through share repurchases and dividends in the first quarter of fiscal year 2021, representing an increase of 17.1% from the same period in the prior year.

Significance for Investors

Against this background of strong cash generation from operations that far exceeds current returns of capital to shareholders, as well as a massive $196 billion combined hoard of cash and marketable securities, the logic behind the bond issue evades some observers. Skeptics note that the yield on the five-year bonds just issued, 0.7%, exceeds the dividend yield on Apple's stock, 0.6%. Thus, using these bond issue proceeds to repurchase stock actually looks costlier, at first glance, than just dipping into existing cash reserves.

However, given that interest expenses are tax deductible, the after-tax cost of this borrowing should be less than the dividend yield on the stock, so perhaps this actually could make economic sense, since dividend payments are not deductible. Additionally, if the after-tax returns on Apple's holdings of marketable securities exceed the company's after-tax borrowing costs, it also makes economic sense to maintain these investments by issuing debt.

In any case, the primary motivation for Apple in issuing these bonds just might be an attempt to lock in financing at low rates while the company can. As Barron's observes: "The most important factor for Apple could be that long-term Treasury yields are expected to keep rising, so the company might want to borrow for decades at low costs while it is still possible. The bonds were sold with coupons between 0.7% (for the 5-year note) and 2.8% (for the 40-year bond)."