Apple's $17B six-part bond offering is largest in history [u]

Posted:
in AAPL Investors edited January 2014
Apple will sell $17 billion in debt in its first bond offering since 1996, as the company borrows funds to fuel its $100 billion capital rewards program.

Bond


Update: Apple's bonds will amount to $17 billion, it was confirmed later on Tuesday by The Wall Street Journal. That number is in fact a new dollar amount record for a U.S. corporate offering.

The iPhone maker is planning to issue date with floating-rate notes maturing in 2016 and 2018, along with fixed-rate bonds with interest dates in 2016, 2018, 2023 and 2043, Apple revealed in a 424(b)(2) filing filing with the U.S. Securities and Exchange Commission on Tuesday.

There is strong demand for Apple bonds, which could allow the company to sell as much as $20 billion in debt, Tom Tucci of CIBC World Markets Corp. told Bloomberg. If Apple were to reach that number, it would be the largest dollar-denominated offering in history.

Apple has $145 billion in cash, but a majority of those funds are overseas and would need to be repatriated according to U.S. tax laws in order to be used for share repurchases. As a result, Apple has instead opted to borrow, in addition to using its domestic cash, to fund its $100 billion capital rewards program.

While Apple's bond sale could become the largest in history, the company's share repurchase authorization plans are already record setting. Apple plans to repurchase $60 billion in shares through the end of calendar 2015, accounting for the bulk of its $100 billion capital initiative.

The remaining money will be used by Apple's quarterly dividend, which was bumped 15 percent last week to $3.05 per common share.

"We are very fortunate to be in a position to more than double the size of the capital return program we announced last year," Apple CEO Tim Cook said in a statement. "We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases."
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Comments

  • Reply 1 of 62
    tallest skiltallest skil Posts: 43,399member


    And on the mention of yet another "largest in history" milestone from Apple, the stock falls $200 per share.

  • Reply 2 of 62
    MacProMacPro Posts: 17,517member
    And on the mention of yet another "largest in history" milestone from Apple, the stock falls $200 per share.

    I hadn't checked AAPL today and you just nearly made me do a very childish thing!
  • Reply 3 of 62
    I find the floating rate component of the issue to be interesting. Initially, I thought that it was a bit weird, but thinking some more about it, the move makes sense.

    Coupon rates will be very low for sure, but the real reason is, I am guessing, it will be a natural hedge against the interest on cash in the next few years.
  • Reply 4 of 62
    I'm wondering... why has no one more knowledgable about finance explained what the impact of a $60Bn share buy back is?

    Foolishly it seems to me if the market capitalisation of AAPL is $413Bn then this effectively would increase value of the other shares by 15%. Or in other words a mere $60 dollars per share.

    As this was announced when the share price had fallen to about $400, then it looks as though it will only take a small additional rise in the price to use up that capital.

    In this case... why is Apple issuing $20Bn that they have to pay back later?

    Maybe it makes sense to use this tactic if there is a future good use for the cash held abroad, e.g.: in capital investment.

    But I've read no analysis of what this all means, and I'd like someone more knowledgable to explain it to myself and other shareholders.
  • Reply 5 of 62


    Companies buy back their shares when they do not have anything better to spend their cash on from an ROI perspective.  Which is sad; I would think they would invest extensively in new product development.  This screams they do not have anything nor any ideas on the next game changing product.  

  • Reply 6 of 62
    e1618978e1618978 Posts: 6,071member
    Paul -

    1. As long as they get a low enough interest rate, and the stock purchase price is low enough, the buyback will be cash flow positive (i.e. less paid out in interest than the dividends on the repurchased stock).

    2. Apple is going to get such crazy low interest rates that later, if inflation starts to pick up, they can buy back the bonds at a huge discount (the value of bonds on the open market drop each time you get an interest rate rise).

    3. Your math is correct, except that when you do a stock buyback you reduce the pool of shares that get frequently traded. Apple is buying back a huge chunk (hopefully almost half) of the 300 million share pool, which will dry up available shares on the market and have more than the effect you would expect.

    4. There is a good use for the cash abroad, buying up/funding the supply chain possibly, and other acquisitions.

    ---

    ex-iphone owner: R&D spending is up huge this year, they just make so much profit that it swamps out any increase.
  • Reply 7 of 62


    So why can't Apple buy it's shares back in foreign markets?


    That Russian guy just bought $100 million... did he have to pay US tax on that money to get AAPL shares?

  • Reply 8 of 62

    Quote:

    Originally Posted by realpaulfreeman View Post



    I'm wondering... why has no one more knowledgable about finance explained what the impact of a $60Bn share buy back is?



    Foolishly it seems to me if the market capitalisation of AAPL is $413Bn then this effectively would increase value of the other shares by 15%. Or in other words a mere $60 dollars per share.



    As this was announced when the share price had fallen to about $400, then it looks as though it will only take a small additional rise in the price to use up that capital.



    In this case... why is Apple issuing $20Bn that they have to pay back later?



    Maybe it makes sense to use this tactic if there is a future good use for the cash held abroad, e.g.: in capital investment.



    But I've read no analysis of what this all means, and I'd like someone more knowledgable to explain it to myself and other shareholders.


     


    Buying back $60B in shares is an attempt to boost Earnings Per Share.  It gives the impression that the company is doing better that it really is when compared to previous EPS quarters that contained more outstanding shares of stock.  


     


    More than likely it's cheaper for Apple to sell Debt than to try and convert it's overseas cash into money within the US system.  That's the only reason it makes sense to issue Debt rather than use the cash they have to conduct the buy-back.  I can't see the unused cash earning more money that the interest rate from the debt.  It's got to be that they would take a significant financial hit if they move the money into the US system.  If it's not then they are being dumb; and I can't believe Apple is dumb.  

  • Reply 9 of 62
    solipsismxsolipsismx Posts: 19,566member
    Companies buy back their shares when they do not have anything better to spend their cash on from an ROI perspective.  Which is sad; I would think they would invest extensively in new product development.  This screams they do not have anything nor any ideas on the next game changing product.  

    No it doesn't. You've erroneously jumped to a conclusion that if a company has more money than it can spend in a country that it must not have any ideas.
  • Reply 10 of 62
    pokepoke Posts: 506member

    Quote:

    Originally Posted by Ex iPhone Owner View Post


    Companies buy back their shares when they do not have anything better to spend their cash on from an ROI perspective.  Which is sad; I would think they would invest extensively in new product development.  This screams they do not have anything nor any ideas on the next game changing product.  



     


    Or it "screams" that the next game changing product won't cost $100 billion to develop any more than the Mac, iPod, iPhone, or iPad did.

  • Reply 11 of 62
    malaxmalax Posts: 1,598member

    Quote:

    Originally Posted by Ex iPhone Owner View Post


    Companies buy back their shares when they do not have anything better to spend their cash on from an ROI perspective.  Which is sad; I would think they would invest extensively in new product development.  This screams they do not have anything nor any ideas on the next game changing product.  



     


    My finance professor described stock buy-backs the same way a few years ago.  However, I think it is unprecedented to have over $100B+ in "cash" and growing.  Apple doesn't have any foreseeable need for more than $100B, so they are returning that money to shareholders.  It is absurd to characterize it as the above poster did however.


     


    Back to the original question about what buying shares will do.  Apple has about 945 million shares outstanding, and plans to buy back $60B worth of shares over the next few years.  So let's imagine they are spending $10B this quarter, and assume an average purchase price of $450 (it's going up now, right?).  That represents 22 million shares.  So after this round of purchasing there will only be 923 million shares.  After spending the whole $60B, there could be 800 million shares (or 850MM or 600MM, who knows, it depends on future share prices).  Every share will be intrinsically more valuable since it represents a larger share of the Apple pie (sorry).


     


    Alternatively, the money Apple sends to investors via dividends sets an expectation for investors that owning Apple shares will provide a stream of future cash payments.  Some investors are looking for that and will be attracted to Apple shares for that reason.  On the other hand, if Apple ever lowers it's dividend in the future, expect the stock to crater.  For that reason, the stock buyback (at the currently super low prices) makes great sense compared to trying to unload tends of billions of dollars solely as dividends,

  • Reply 12 of 62
    jragostajragosta Posts: 10,473member
    I'm wondering... why has no one more knowledgable about finance explained what the impact of a $60Bn share buy back is?

    Foolishly it seems to me if the market capitalisation of AAPL is $413Bn then this effectively would increase value of the other shares by 15%. Or in other words a mere $60 dollars per share.

    That's a reasonable first level estimate. IF the investors had a fixed P/E ratio in mind and you take 15% of the shares off the market, then the P/E would drop - and investors would bid the price up by roughly 15% to reach the 'equilibrium' P/E ratio.

    However, that's too simplistic - especially in light of Apple's incredibly low current P/E ratio. Investors have apparently lost confidence in AAPL and have driven the P/E to ridiculously low levels. A large part of that is confidence. Apple's use of $60 B to buy stock is also an effort to convince investors that "even with our incredible profitability, we don't see any immediate investments that are better than buying our own stock". The hope is that this will spur confidence and increase the share price by more than the percentage of shares being repurchased.
    As this was announced when the share price had fallen to about $400, then it looks as though it will only take a small additional rise in the price to use up that capital.

    Not sure what you're saying. Even if the shares jump to $500 after the share buyback, that doesn't return any cash to Apple, so it is completely unrelated to the amount of cash on hand.
    In this case... why is Apple issuing $20Bn that they have to pay back later?

    Maybe it makes sense to use this tactic if there is a future good use for the cash held abroad, e.g.: in capital investment.

    But I've read no analysis of what this all means, and I'd like someone more knowledgable to explain it to myself and other shareholders.

    The logic works like this:
    - Much of our cash is overseas
    - We can bring the cash back, but we have to pay a 35% marginal tax rate on the tax, so we'd reduce our cash by $90 B in order to buy back $60 B in stock.
    - If we borrow the money, we only pay a few percent penalty and then pay off the debt from future income. With the cash available overseas, it's low risk both for us and the bond holders. If some problem ever occurs, we can always repatriate the cash later (paying the penalty) to pay off the debt.

    So the worst case scenario is that they bring back the cash at a later date and pay the tax - which is no different than bringing back the cash NOW and paying the tax (they would, however, have a very small interest expense). The best case scenario is that they easily pay off the debt without tapping the overseas cash. So the downside to borrowing is not that large.

    In addition, what happens if the US government does allow a tax holiday for repatriated cash? They simply bring the cash back, pay off the debt, and get the best of both worlds.
  • Reply 13 of 62


    However you slice it, now's the time to buy.

  • Reply 14 of 62
    slurpyslurpy Posts: 5,030member

    Quote:

    Originally Posted by Ex iPhone Owner View Post


    Companies buy back their shares when they do not have anything better to spend their cash on from an ROI perspective.  Which is sad; I would think they would invest extensively in new product development.  This screams they do not have anything nor any ideas on the next game changing product.  



     


    What an incredibly astute, insightful, and rational observation. 


     


    If your future posts are at this same level of shit, we're in for a mind-numbingly trollish ride. If the mods here had any sanity, your username, as evidence of your intent to shamelessly troll, would be enough reason to ban you. 

  • Reply 15 of 62

    Quote:

    Originally Posted by SolipsismX View Post





    No it doesn't. You've erroneously jumped to a conclusion that if a company has more money than it can spend in a country that it must not have any ideas. That's a pretty troolish thing to say but I'll give you the benefit of the doubt by saying you're just ignorant and myopic, despite your handle.


     


    Check my posting history; I have repeatedly stated I want to jump back into the iPhone realm.  But won't until they make a bigger screen.  My post was not a troll post but exactly my opinion.  If I jumped to the wrong conclusion then post your thoughts rather than just insulting me.

  • Reply 16 of 62

    Quote:

    Originally Posted by Slurpy View Post


     


    What an incredibly astute, insightful, and rational observation. 


     


    If your future posts are at this same level of shit, we're in for a mind-numbingly trollish ride. If the mods here had any sanity, your username, as evidence of your intent to shamelessly troll, would be enough reason to ban you. 



     


    Check my posting history; I am not a troll.  Again post your thoughts on why you feel I am wrong rather than insults.  Contribute constructively as I have please.

  • Reply 17 of 62
    Theoretically you are right a $60Bn share buy back would increase the value of each floating share since the market cap should stay constant only with now less shares in the market.

    But that's only the theory. The $60Bn share buy back plan does not mean that "we will increase the value of your share by 60$ and then we stop buying back".

    There are many other parmeters that determine the value of a stock price like future earnings and growth opportunities. Since AAPL had high exponential growth over a far longer period than any other company it stock kind of priced in that perpetual high growth.

    The stock buyback plan and dividend increase now on the other hand kind of means that "hey we don't have any ideas how to develop great new products so we just hand you out our extra cash and a percentage of our earnings since we won't need it anymore". This more or less means that this exponential growth is over which on the other hand means that this needs to be priced in by the market, i.e. huge drop in the stock price we saw in the last months.

    So the theoretical share gain from a buy back in destroyed by repricing in the future growth of AAPL.

    Additionally you have that the $150Bn has in cash are also priced into the market cap (AAPL market cap = "market cap of Apple as company alone " "$150Bn cash") . This cash will leave the company and therefore the cash pile will decrease which will decrease the "priced in cash" of it's stock.

    Now about the bond offering. As stated in the article that cash is oversea and could only be given back to investors if it is repatriated. But repatriating that cash would mean paying taxes to the US treasury. Since AAPL does not want that it issues debt and hopes in the mean time to find a solution for the cash, for exemple lobby for lower taxes and repatriate it cheaper later.


    In my opinion AAPL's cash management is disastrous. Stock buy back and dividends is the worst kind of capital allocation you can do. Apple could have done so much with it. Acquire whole companies (Twitter, Facebook, AT&T even something crazy like Volkswagen or Boeing!) or even create a powerful bank with a mouse click! But instead it now even makes a pact with the devil and issues bonds via Goldman Sachs... Great job!
  • Reply 18 of 62
    solipsismxsolipsismx Posts: 19,566member
    Check my posting history; I have repeatedly stated I want to jump back into the iPhone realm.  But won't until they make a bigger screen.  My post was not a troll post but exactly my opinion.  If I jumped to the wrong conclusion then post your thoughts rather than just insulting me.

    I did post my thoughts. I felt your comments were shortsighted and ignorant to assume that any company, not just Apple, has zero ideas because they make more money than they can spend. I really don't know how I can be anymore clear.
  • Reply 19 of 62

    Quote:

    Originally Posted by SolipsismX View Post





    I did post my thoughts. I felt your comments were shortsighted and ignorant to assume that any company, not just Apple, has zero ideas because they make more money than they can spend. I really don't know how I can be anymore clear.


     


    Then I hope you insult the other posters as you did me that are also posting the same message as I.

  • Reply 20 of 62
    solipsismxsolipsismx Posts: 19,566member
    Then I hope you insult the other posters as you did me that are also posting the same message as I.

    What other posters stated that making more money than you can spend means you have no ideas to foster?
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