The clever economics behind Apple's $17 billion bond offering
Apple on Tuesday raised $17 billion via a bond offering as part of its recently announced capital program which aims to return $100 billion to shareholders by the end of 2015. Apple's capital return program is comprised of two components: an increased quarterly dividend of $3.05 a share and a $55 billion stock repurchasing program.
To help finance its new plan, Apple decided to issue debt, prompting many to wonder why the company didn't dip into its $145 million cash hoard. The answer is that $100 billion of Apple's cash lies overseas. Consequently, Apple would be subject to unfavorable income tax rates if it brought that cash back to the U.S.
So instead, Apple chose to borrow money at extremely low rates to help fund its capital return program. The appeal is that the interest Apple will owe on its issued debt will be markedly lower than the income tax it'd be charged if it repatriated its foreign stockpile of cash.
That certainly makes economic sense, but there's even more cleverness behind Apple's stock repurchasing plan and dividend increase than most people realize.
Apple this week issued bonds with maturities of 3, 7, 10, and 30 years. While the rates on each type of note vary depending on the duration, the weighted average of Apple's interest rates comes out to about 1.85%, which if you do the math, amounts to approximately $314 million in interest payments.
As Evan Niu of The Motley Fool points out, there are some interesting cost savings going on behind the scenes that may not be readily apparent at first glance.
Here's a quick breakdown:
Apple currently is trading in the $447 range. Using the 1.85% interest rate from above, we see Apple will be paying back about $8.26 in interest for each $447 share that it repurchases. At the same time, each share that Apple repurchases will no longer be a share it has to pay a third-party dividend on. Given Apple's new quarterly dividend of $3.05, each repurchased share of Apple will free up $12.20 (4 x $3.05) that Apple would otherwise be paying as an annual dividend.
"It's like Apple is paying $8 to save $12," Niu writes.
What's more, the $8/share Apple will repay as interest is completely tax deductible. In contrast, the $12.20 in annual dividend payments per share is not tax deductible.
The Financial Times adds:
Gerald Granovsky, an analyst at Moody's, said: "If you assume the statutory 35 per cent corporate tax rate, based on the data available and on a back of the envelope calculation, to generate in the US the equivalent of $17bn the company would need to repatriate $26bn. 'That is less attractive than paying the $300m in interest attached to this bond sale,'
In essence, Apple is exchanging non-deductible and more expensive dividend payments for tax deductible interest payments while purchasing back shares at relatively low price-points. All the while, its billions of dollars in overseas cash remains untouched and untaxed.
