On the last business day of July, Apple (AAPL) - Get Apple Inc. (AAPL) Report made the news for raising $6.5 billion in cash via debt issuance. The Cupertino company took advantage of the low interest rate environment and its business momentum to borrow for as low as 92 basis points above the treasury rate on a 40-year instrument.
But why, considering how well Apple has been performing lately, might the company need to borrow so much money – the “fourth time tapping the bond market since May 2020”? The Apple Maven discusses the three most likely reasons.
(Read more from the Apple Maven: Apple Stock: Should You Buy It In August?)
#1. Share buybacks
According to Seeking Alpha, Apple has produced a whopping $104 billion in cash from operations in the past four quarters. This number has been growing progressively since 2017, when the inflow reached a more modest (but still impressive) $64 billion for the year.
However, Apple has not been squirreling the money away. An oversized chunk of these assets has been deployed towards share repurchases: a whopping $90 billion in the past four quarters alone (vs. CFOA of $104 billion, as mentioned above), up sharply from only $35 billion in 2017.
Buybacks have been one of Apple’s secret ingredients to EPS growth, as I explored in more detail in June 2020. The fewer the number of shares outstanding (in this case, a 30% reduction since fiscal 2012), the more “concentrated” net income is – hence, the higher the EPS.
When it comes to retiring equity, Apple is unlikely to take the foot off the gas soon. This is probably the main reason why the company needs to raise cash cheaply in the debt markets. This is also why, despite impressive results, Apple continues to see its net cash balance decline year after year (see below).
#2. Potential dividend boost
This is a bit more speculative of a reason, but it is possible that Apple might need to capitalize ahead of a dividend hike. In August of last year, I made an argument for the doubling of the company’s dividend payments, which would effectively raise the stock’s yield to 1.2% and, possibly, attract a new type of investor to the stock.
Worth noting, doubling the dividends would not be too much of a burden for Apple. First, the total payments in the past year have been only $14 billion – way less than the $90 billion allocated to buybacks. And, should equity retirement continue, dividend payment growth would be partially offset by progressively fewer shares outstanding.
#3. New business development
Going up one notch in the speculation scale, Apple could be raising cash ahead of a large business development opportunity. It has been speculated that a mixed reality device could be released next year, and that the Apple Car would follow not much longer after that.
Should this be the case, one would have expected to see Apple’s capex and opex rise in the past few years. However, the former has not: $9.6 billion in the last four quarters vs. $13.3 billion in 2018. The latter has been going up, but not much faster than the pace of revenue growth: less than 40% cumulative since 2018.
While I do not doubt that Apple will, in fact, introduce new products in the next one to five years, I do not think that recent debt issuance has much to do with these initiatives.
(Read more from the Apple Maven: Chat With Wedbush’s Dan Ives: How To Think Of Apple’s Valuation)
Apple has raised another $6.5 billion in debt. Why do you think the company needs more cash, considering how well it has been performing lately?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)