Apple Inc. (AAPL) is the most valuable company in the world. Every now and then Alphabet Inc (GOOG, GOOGL) will rally and claim the throne, but Apple’s been at the top of the heap for years now, having taken the crown from Exxon Mobil Corporation (XOM) a few years back.
Currently, the public markets think it’s worth $535 billion, a full $50 billion more than Alphabet. So, when AAPL stock owners learn that the company just took to the debt markets to raise $12 billion, they’ll be excused for scratching their heads.
The move is even more confounding when you’re poking around researching AAPL stock and you take a gander at its financials. On its balance sheet, you’ll see that …
Apple Has $216 Billion in Cash
You don’t have to know much about the stock market to sense that there’s something nonsensical about borrowing money when you have more than enough cash to finance anything you need. Why would AAPL borrow $12 billion — and agree to pay it back with interest — when it’s literally the most profitable company in the world?
There are currently four active U.S. mints, located in Philadelphia, Denver, San Francisco and West Point. The de facto corporate mint of the U.S. is in Cupertino, California. And that mint is borrowing money?
It’s one of the most important concepts in corporate finance: minimizing cost of capital. Free money is better than money you’ve gotta pay back with interest.
Don’t worry, Tim Cook & Co. have taken Capital Allocation 101. They’re not driving AAPL stock into the ground (purposefully).
The Caveat to the AAPL Stock Cash
We see the $216 billion figure bandied about almost daily in discussions about AAPL stock. But what is rarely addressed is the fact that a whopping 93% of that is held overseas, essentially trapped. Due to U.S. tax laws, Apple would have to pay taxes on that cash — which it already paid taxes on abroad — just for the privilege of bringing it back to the States.
Do the math: 93% of $216 billion is $201 billion. At a 35% repatriation tax, AAPL would pay $70 billion to Uncle Sam to bring it back home; the $200 billion becomes $130 billion. At a 40% rate, Apple pays $80 billion and returns with just $120 billion.
This draconian rate is the reason CEO Tim Cook said on a recent 60 Minutes episode that Apple would “never” repatriate its cash with the current tax code.
Since Apple must do everything at a very large scale, yesterday’s $12 billion bond offering actually makes sense. Apple has a certain amount of clout, making lenders more likely to lend at a lower rate than it would to others. Interest rates are at historical lows, and there’s little doubt that AAPL will be able to earn a return greater than its borrowing cost.
The order book for the $12 billion offering was $30 billion, meaning creditors had 2.5 times the demand that Apple could supply.
The $12 billion doesn’t materially change things for AAPL stock. The company will use the funds for “general corporate purposes,” which is exceptionally vague but means that Apple could use the money for things like paying off other debt, or even making an acquisition.
Hey, now that I think about it … isn’t it curious that Apple just borrowed $12 billion — Twitter Inc‘s (TWTR) current market cap?
Coincidence?
Yes. Twitter is a garbage heap.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
