But despite its extraordinarily flush balance sheet,the technology behemoth borrowed money on Tuesday for the first time in nearly two decades. In a record-size bond deal,the company raised $17 billion,paying interest rates that hovered near the low-cost debt of the United States Treasury.
Apples return to the debt markets raises a riddle: Why would a company with so much cash even bother to issue debt? The answer has a lot to do with the frenzied state of the bond markets. Companies are issuing hundreds of billions of dollars in debt to exploit historically low interest rates. They are also feeding strong investor demand for high-quality corporate bonds as an alternative to money market funds and Treasury bills,which are paying virtually nothing.
Apples manoeuvre,however,also reflects the unusual challenges of a fabulously successful company with a sinking stock price. Apple is plagued by concerns that its growth may be slowing,and its shares have plummeted from a high last fall of more than $700 to under $400 last month. In an effort to assuage a growing chorus of frustrated investors,the company is issuing bonds to help finance a $100 billion payout to shareholders.
Taking on debt can actually magnify the returns for shareholders and improve stock performance,financial specialists say. It can reduce the cost of the capital that a firm invests in its business. In addition,after a stock buyback,there are fewer shares,which can increase their value. Yet even as shareholders and analysts welcome the financial tactics,they emphasise that the company must continue to innovate.
This is a substantial return of cash and its the right thing to do on many levels, said Toni Sacconaghi,an analyst with Bernstein Research. But,ultimately,the company has to execute. This is no substitute for that.
By raising cheap debt for the shareholder payout,Apple also avoids a potentially big tax hit. About two-thirds of Apples cash about $102 billion sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors,it could have significant tax consequences for the company. In some ways,the bond issue is a response to that tax situation.