Apple (NASDAQ:AAPL) stock jumped 8% April 23 on the news it was upping its stock buyback from $60 billion to $90 billion as part of its commitment to return $130 billion to shareholders by the end of 2015.
That’s very good news for Carl Icahn, who said he agrees completely with the Apple buyback.
To fund the buyback, AAPL is selling $17 billion in debt sometime later this year in both domestic and international markets. It will be the second consecutive year it has gone to the debt markets for cash after being debt-free since paying down $300 million in fiscal 2004.
Last year, AAPL saved an estimated $9.2 billion in taxes using debt instead of overseas cash. At the time, Moody’s vice president Gerald Granovsky called it “a no-brainer.” No doubt he feels the same about this year’s raise.
There’s only one problem.
While this might be good for Apple stock in the short term, it’s certainly not any good for American taxpayers. And furthermore, in the long term, it’s arguable how much value the Apple buyback provides Apple stock.
In fact, when it comes to buybacks, investors should always be careful what they wish for. Here’s why.
Apple Stock and Taxpayers
By the time AAPL sells its $17 billion in bonds, America (that’s you) will be out more than $18 billion in taxes. Wait, though — there’s more. Apple’s annual interest expense on last year’s bond sale is about $308 million. The buyers of those bonds got hosed, making Warren Buffett look pretty smart for passing on the offering due to low yields.
Although this year’s $17 billion sale could involve higher coupon rates it’s still unlikely that Berkshire Hathaway (BRK.B) will have any interest. Add another $308 million in annual interest for this year’s offering, and AAPL is saving itself $215 million in annual taxes through interest expense deductibility. Its $3 billion in 3.85% notes due 2043 could produce tax savings of as much as $1.2 billion over 30 years. However, that’s unlikely given that AAPL will probably have redeemed much of it by then. Nonetheless, this hypothetical worst-case scenario is an eye opener.
I’ve said it before — Apple’s stance on taxes is un-American. This might not matter to investors of Apple stock, but it should concern average Americans because it’s just plain wrong.
Apple Stock Buyback
Apple Insider contributor Daniel Dilger makes the argument that Apple’s $44 billion buyback over the past four quarters has directly contributed to the $100 million increase in its market cap over the same period. He goes on to suggest improving fundamentals also had a part to play in Apple stock moving up 29.2% year-over-year. It’s a very reasonable argument.
Just look at the numbers…