Apple raises a bunch more debt to fund its stock buyback program

Posted May 2, 201410 yr

This week Apple managed to complete a bond sale of $12 billion. In short, Apple raised $12 billion in several tranches with maturity dates spread between three and 30 years. The yields on the bonds range between 1.07% and 4.43%. Some Apple followers are curious why they're doing this. In simple terms, Apple has committed to return some of its cash to shareholders and one tax efficient way to do this is buy back its own stock. Here's how it works:

Apple uses its cash to buy back Apple stock
The number of shares in existence drops (by however many Apple buys for cancellation)
The earnings per share of Apple's remaining share rises because the corporate profits are spread among fewer shares
The stock price rises because the corporation's value is now spread among fewer shares
The result is Apple has returned cash to shareholders in the form of capital gains

If you're interested in some of the specifics around the deal you can read all about it in the Wall Street Jounal.

So why are they raising cash in the debt market? Doesn't Apple have a ton of cash? Yes they do. In fact as of last quarter they held $150 billion in cash and marketable securities. But here's the thing … only $18.4 billion of this cash is classified as "domestic" (in the US). The rest is in offshore accounts, and would require a huge tax payment if Apple wanted to repatriate the cash.

To put the tax in perspective, eBay recently decided to bring home $9 billion of offshore cash. In order to do this, the tax bill was approximately $3 billion. Imagine if Apple wanted to repatriate all of its offshore cash. They'd pay over $40 billion to Uncle Sam.

Seems a bit hefty, eh? Hopefully in time Apple will succeed in pushing for tax reform. Until then, Apple prefers to issue domestic debt and use the cash raised from that debt issuance to buy back stock.

It's tax efficient.