Wells Fargo: Apple may need to raise more debt to pay for increased share repurchase

Posted:
in AAPL Investors edited February 2015
While the $6.5 billion bond issue revealed on Monday may be enough to cover its existing capital return program, Wells Fargo believes that Apple could be forced to either raise an additional round of debt or repatriate cash from overseas if the program is to continue its traditional annual increase.




Wells Fargo analyst Maynard Um believes that Apple's $20 billion in onshore cash and the $6.5 billion bond offering would easily pay for the current share repurchase program and a projected 9 percent increase in the company's dividend, but would not stretch beyond that. Um made the prediction in a Monday evening note to investors, a copy of which was provided to AppleInsider.

As noted by Um, Apple raised $17 billion in 2013 and increased the buyback program by $50 billion with $42 billion in domestic cash on the balance sheet. 2014 brought a $12 billion raise with $18 billion in domestic cash and a $30 billion increase to the repurchase initiative.

It remains unclear whether Apple will in fact enlarge its now-$130 billion capital return program this year. The company spent $5 billion to repurchase 46 million shares in the first fiscal quarter of 2015 and retired an additional 8 million shares.

During the company's most recent earnings call, CEO Tim Cook said that Apple continues to "solicit feedback from a broad base of investors" and promised a program update would be announced during the next call in April.

Activist investor Carl Icahn, who has amassed a significant position in Apple, continues to advocate for increased buybacks. Icahn recently suggested that he would increase his current $203 price target for Apple shares.
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Comments

  • Reply 1 of 23

    With Obama proposing 14% tax on foreign cash, repatriated on not, Apple's hands may be forced. However, at current interest rate of nearly zero, I see no reason why Apple doesn't want to issue more debts to finance their capital plan.

  • Reply 2 of 23
    solipsismysolipsismy Posts: 5,099member
    Good luck on forcing Apple to bring back foreign profits at their current taxable rate. I'd simply reduce the buyback if that was somehow forced upon me.
  • Reply 3 of 23
    Apple -- or any reasonably smart company -- is not stupid to keep growing its share repurchase program irregardless of where the stock price is.

    This analyst is Clueless 101.
  • Reply 4 of 23
    Maynard Um has downgraded Apple a couple of times in the last 18 months:

    http://appleinsider.com/articles/15/01/26/wells-fargo-maintains-neutral-outlook-on-apple-says-market-expectations-too-high

    He and Andy Heagraves of Pacific Crest Securities are two shameless Apple bear who have been proved wrong again and again in the last 2 years but would refuse to admit their wrong call. They just raise their estimate of earnings to cover their error.

    I would not trust what Um has to say about Apple.
  • Reply 5 of 23
    I always find it interesting how borrowing money to do stock buybacks, when you have cash on hand, makes more sense. It tells me our tax system isn't working right.
  • Reply 6 of 23
    sflocalsflocal Posts: 4,698member
    Quote:

    Originally Posted by jmgregory1 View Post



    I always find it interesting how borrowing money to do stock buybacks, when you have cash on hand, makes more sense. It tells me our tax system isn't working right.



    I don't think it's an issue of the tax system.  When interest rates to borrow money being so low, Apple could keep its cash hoard sitting in bank accounts and short-term investments that the difference between rates is to Apple's advantage.



    Heck, even if Apple had all the money in the US, they would probably still borrow money and continue letting its own cash hoard work to generate more interest in other investments.  That's hugely simplified of course.  I couldn't even imaging how the bean-counters at Apple are handing the hundreds of billions of dollars that are sitting around.  That's a lot of accounts to deal with I'm sure!



    I recently bought a new vehicle that I was going to pay all cash for.  Then I got a 0% offer from a bank of mine for 12 months.  So I went ahead and "financed" it for 12 months.  So I keep my money invested, earning money and pay the amount slowly over 12 months.  It's basically free money.  Does that mean something is wrong with the tax system?  No.  It's responsible planning.

  • Reply 7 of 23
    I guess he knows better than the management of the most successful company in the world .....
  • Reply 8 of 23
    jmgregory1 wrote: »
    I recently bought a new vehicle that I was going to pay all cash for.  Then I got a 0% offer from a bank of mine for 12 months.  So I went ahead and "financed" it for 12 months.  So I keep my money invested, earning money and pay the amount slowly over 12 months.  It's basically free money.  Does that mean something is wrong with the tax system?  No.  It's responsible planning.

    I just did that with LASIK (18 months interest free) and I'm about to do that with a new car (36 months interest free). I was also going to pay cash up front for these, but it would be irresponsible for me not to finance.

    The only negative to this is the LASIK gets counted as revolving credit (like a credit card) which puts me over 15% utilization for my available create, thereby lowing my credit rating temporarily until that is brought back down.

    But even these loans have inherent benefits to my credit rating as they will eventually increase my score for many years to come.
  • Reply 9 of 23
    On January 10, 2014, Apple had 6.244 billion shares outstanding. On January 9, 2015, there were only 5.825 billion. Without spending a nickel more in total dividends paid, Apple can increase the dividend per share by 7.2% just based on the decrease in number of shares outstanding.

    The math is actually a little more complicated because the number of shares declined quarter by quarter--but the point remains that Apple can increase the dividend rate without consuming much more of their US-sourced profits or new bonds.
  • Reply 10 of 23

    I wonder if Apple's growth will accelerate faster than the share buyback. No particular reason, other than to see if they make it to the Trillion Dollar market cap.

  • Reply 11 of 23
    swiftswift Posts: 436member
    Quote:

    Originally Posted by jmgregory1 View Post



    I always find it interesting how borrowing money to do stock buybacks, when you have cash on hand, makes more sense. It tells me our tax system isn't working right.

    Made to favor banks and finance. 

  • Reply 12 of 23
    joshajosha Posts: 901member
    Quote:

    Originally Posted by SolipsismY View Post



    I just did that with LASIK (18 months interest free) and I'm about to do that with a new car (36 months interest free). I was also going to pay cash up front for these, but it would be irresponsible for me not to finance.



    The only negative to this is the LASIK gets counted as revolving credit (like a credit card) which puts me over 15% utilization for my available create, thereby lowing my credit rating temporarily until that is brought back down.



    But even these loans have inherent benefits to my credit rating as they will eventually increase my score for many years to come.

    A 0% interest loan for a car sounds unbelievable, but it is more believable if you could have obtained a discount on the car by paying cash up front. All car dealers love cash to pay down their loans on their car stock.

     On most of my car purchases I've obtained a lower cost by paying the total in cash directly to the car dealer.

  • Reply 13 of 23
    sflocalsflocal Posts: 4,698member
    Quote:

    Originally Posted by JoshA View Post

     

    A 0% interest loan for a car sounds unbelievable, but it is more believable if you could have obtained a discount on the car by paying cash up front. All car dealers love cash to pay down their loans on their car stock.

     On most of my car purchases I've obtained a lower cost by paying the total in cash directly to the car dealer.




    Depends on what you're buying.  For me there was no room for negotiation.  It was MSRP, or move out of the way for the line of people that would buy it, and the dealer knew that as well as I.  It's not like I was buying a Ford that they made a million identical models that will sit on the lot for a while.



    The point being is that when confronted with what is essentially free money, it's crazy to not take advantage of it.

  • Reply 14 of 23
    Quote:

    Originally Posted by sflocal View Post

     

    Heck, even if Apple had all the money in the US, they would probably still borrow money and continue letting its own cash hoard work to generate more interest in other investments.  That's hugely simplified of course.  I couldn't even imaging how the bean-counters at Apple are handing the hundreds of billions of dollars that are sitting around.  That's a lot of accounts to deal with I'm sure!

     


     

    Most of it is already in the U.S., which is what a lot of people don't realize when they start talking about "overseas" money. Most of Apple's cash hoard from "overseas" is actually sitting in NYC banks. They can borrow against it at will, and interest rates that are below the rate of inflation mean that the U.S. government is paying Apple to borrow money.

  • Reply 15 of 23
    Quote:

    Originally Posted by zoffdino View Post

     

    With Obama proposing 14% tax on foreign cash, repatriated on not, Apple's hands may be forced. However, at current interest rate of nearly zero, I see no reason why Apple doesn't want to issue more debts to finance their capital plan.


     

    Isn't it a bad idea to take on debt when there's a real possibility of widespread deflation?  Doesn't that increase the real value of debt?  Wouldn't we be in a deflationary period if it weren't for unprecedented measures by the Fed?  Aren't there people (from a wide range of backgrounds and viewpoints) arguing that these methods have only delayed the consequences of the 2008 financial crisis, portending a larger crisis in the not so distant future?

  • Reply 16 of 23

    Too big to fail, but big enough to tank the world economy bank, says something.

     

    I'm on Apple's side, but I think that any corporation that keeps cash off shore should be subject to crushing domestic taxes.

  • Reply 17 of 23
    joogabah wrote: »
    Isn't it a bad idea to take on debt when there's a real possibility of widespread deflation?  Doesn't that increase the real value of debt?  Wouldn't we be in a deflationary period if it weren't for unprecedented measures by the Fed?  Aren't there people (from a wide range of backgrounds and viewpoints) arguing that these methods have only delayed the consequences of the 2008 financial crisis, portending a larger crisis in the not so distant future?

    You're listening to the same analyst that have been calling for Apple to fail or years. Replace Apple with the economy and its been the same story since 2010 with them
  • Reply 18 of 23
    applezilla wrote: »
    Too big to fail, but big enough to tank the world economy bank, says something.

    I'm on Apple's side, but I think that any corporation that keeps cash off shore should be subject to crushing domestic taxes.

    And another reason companies are considering tax inversions at a higher rate than ever
  • Reply 19 of 23

    It's more likely AAPL is going to wind down the extra share repurchases. Domestic cash generation will be more than enough to address the dividend and share dilution for compensation.

  • Reply 20 of 23


    Quote:
    Originally Posted by lawrence View Post

     

    It's more likely AAPL is going to wind down the extra share repurchases. Domestic cash generation will be more than enough to address the dividend and share dilution for compensation.

     



    and this...

     

    Quote:

    Originally Posted by byundt View Post



    On January 10, 2014, Apple had 6.244 billion shares outstanding. On January 9, 2015, there were only 5.825 billion. Without spending a nickel more in total dividends paid, Apple can increase the dividend per share by 7.2% just based on the decrease in number of shares outstanding.

     

    ...yes.  Will wind down or reduce share repurchase.  I hope the total amount of dividends are not increased (i.e. div/sh will increase but without spending a nickel more).  

     

    Quote:

    Originally Posted by JoshA View Post

     

    A 0% interest loan for a car sounds unbelievable, but it is more believable if you could have obtained a discount on the car by paying cash up front. All car dealers love cash to pay down their loans on their car stock.

     On most of my car purchases I've obtained a lower cost by paying the total in cash directly to the car dealer.


    This is not true for many large dealerships.  Not sure why, but maybe because the dealership is given large incentives by the manufacturer's finance arms to process loans (rather than to take all cash)?  I'm surprised myself but seems that cash is not quite king at dealerships.

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