iBonds: Great for Apple, Not for You

Pricing pressure will make those bonds unattractive

   
iBonds: Great for Apple, Not for You

For those of us patient Apple (NASDAQ:AAPL) investors waiting for a little payback, our time has come: Apple announced a 15% hike in the quarterly payout and a history-making $60 billion share repurchase authorization.

Finally, a reason to smile.

Of course, this will amount to roughly $11 billion in annual dividend payouts and $100 billion required through 2015 to make those buybacks … which brings us to the other side of the announcement: Apple is going out to the debt markets to raise some of that money.

The exact amount of the borrowing is yet to be determined, as is the tranche structure, pricing and terms, but regardless of the details, most everyone has already asked themselves the question, “Why take on debt when you have $145 billion in cash and generate tens of billions in free cash flow?” Well …

  • Taxes: Just more than $100 billion of that cash sits in foreign bank accounts, and repatriating the money could conceivably cost the company $35 billion at the full corporate tax rate. Apple is not going to fork over that kind of money.
  • Debt Is Cheap: Moody’s assigned Apple a Aa1 senior unsecured rating. (Standard & Poor’s equivalent is AA+). Bloomberg reports the average yield on corporate debt in the U.S. ranked higher than junk is at 2.69%, according to Bank of America Merrill Lynch index data, and those with AA ratings can borrow at less than 2% for 10-year terms.
  • Balance Sheet Is Clean: Apple sold off its last $300 million of long-term debt way back in 2004. Apple can absorb gobs of debt without making a dent in its leverage ratio, and as for interest coverage ratios … please.
  • The Template Is There: Microsoft (NASDAQ:MSFT) made the biggest splash in the tech industry back in 2009 with a three-tranche offering of $3.75 billion, and followed that one with others, including $2.25 billion this past November.

Really, Apple has no reason not to tap the debt market. It’s cost-effective and practical.

Those bonds are a bit more of a sticky wicket for investors, though.

Hype will almost certainly be huge. It’s Apple. And Apple generates buzz. And while it’s not a true “first-time” issuer, this is the first offering in a long time, so that buzz’ll be a little stronger.

Then there’s the market’s appetite for highly rated corporate bonds right now. Lipper says $45 billion of investor cash flowed into funds dedicated to these bonds in Q1 2013 — the biggest first-quarter draw ever, according to the Wall Street Journal.

Oh yes, interest in this one will be high.

But there’s the rub: too much of a good thing. The race to buy the issues at par could — no, will — get frenzied, driving the prices up in much the same way as a popular IPO acts. And much like IPOs, individual investors will have to wait their turn until after the institutions swoop in. By the time you and I get a chance to buy, we’ll be paying premium prices for what will be miniscule yields.

You can see this at work today with other similarly rated issues: Berkshire Hathaway (NYSE:BRK.A, BRK.B), Kimberly-Clark (NYSE:KMB) and Walmart (NYSE:WMT) five-year debt instruments, issued with coupons over 4%, trade with yield-to-maturity levels of just under 1.5%. So it might not take long to see a similar Apple bond yield.

Meanwhile, Apple stock is yielding 3% in addition to its chance of appreciation.

The decision looks pretty plain to me. If things don’t change much by the time these bonds are issued, I’m not going to bother.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL and MSFT.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/ibond-offering-will-bring-investors-i-promise-msft-aapl-wmt-brk-a-brk-b/.

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