Emergency measures give AAPL cheap credit for buybacks

Emergency measures designed to ensure business continue to have access to financing during the coronavirus crisis have effectively provided Apple with cheap credit to fund stock buybacks and dividend payments, says a new report today.

The government backing enabled Apple to borrow money on the bond market at the lowest rates it has paid for seven years …

Background

Although Apple is an extremely cash-rich company, much of that money is earned outside the US, and it would have to pay high tax rates to repatriate the cash. For that reason, it makes sense for the company to borrow money to spend inside the US.

Apple from time to time borrows money by selling bonds – effectively a promise to repay money at a fixed rate of interest at a fixed point in the future, anywhere from one year to thirty years ahead. It borrowed $7B last September, for example.

The company’s strong creditworthiness means that it can offer very low returns on these bonds, as the risk of default is close to zero. However, emergency government measures have now allowed the company to offer even lower returns than usual.

Emergency measures

The government has introduced two emergency measures to keep credit flowing to businesses during the crisis, as Reuters reports.

The Fed slashed interest rates to almost zero in March and said it would act as buyer of last resort in the investment-grade corporate bond market, in a bid to help cash-strapped companies access capital markets roiled by the economic fallout from the pandemic.

While the Federal Reserve has yet to buy a single corporate bond, the intervention has fueled record issuance by companies in need of funding, such as Boeing, Marriott International and Ford.

The policy has also allowed financially strong companies such as Apple, which had just over $40 billion in cash as of the end of March, to reduce its cost of capital to the benefit of shareholders.

‘Buyer of last resort’ means that if investors don’t buy the bonds, the Federal Reserve will. Because Apple can be sure of selling all its bonds, it can offer an even lower return than usual. All bonds were in fact bought by investors.

Reuters reports that Apple has just sold $8.5B worth of bonds at extremely low rates.

The technology company raised $8.5 billion by selling four different bonds with maturities ranging from three years to 30 years. It sold a $2 billion three-year bond and a five-year $2.25 billion with coupons of 0.75% and 1.125% respectively, the lowest rates the company has paid on bonds with such durations since 2013, according to Refinitiv IFR data.

The coupons on Apple’s 10-year and 30-year bonds were also the lowest the company has paid in the past years, according to the Refinitiv data.

The funds will go toward general corporate purposes, including share repurchases and dividend payments, Apple said in a regulatory filing. During the six months ended March 28, Apple spent $38.5 billion to repurchase its own stock.

Apple announced during last week’s earnings call that it would increasing its dividend and spending more on stock buybacks.

Apple’s board of directors has declared a cash dividend of $0.82 per share of the Company’s common stock, an increase of 6 percent. The dividend is payable on May 14, 2020 to shareholders of record as of the close of business on May 11, 2020. The board of directors has also authorized an increase of $50 billion to the existing share repurchase program.

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