THE APPLE CASH DISPOSAL PLAN: ASK THESE QUESTIONS BEFORE SWILLING THIS CIDER

5/1/13

Apple (AAPL) sold bonds yesterday for the first time in 20 years.   The $17 billion dollar, AA+, Aa1, multi-tranche deal was three times oversubscribed  despite coming at really tight spreads to outrageously low treasury yields, e.g., 40, 75, and 100 basis points (“bps”) over the very rich 5, 10, and 30 year respectively.   The debt deal was interesting enough, but the larger plan of which it is a part, i.e., to return $100 billion in cash to Apple investors in dividends and stock buybacks over the next three years, is even more intriguing.   In the wake of this rather sudden change of heart at Apple regarding giving the shareholders their money, investment wise men have debated whether Apple has now become a value stock after being a growth stock darling since its founding.

Yours truly is no tech expert and certainly is no Apple expert.   However, I know the most important thing about the value/growth stock debate, i.e., that the distinction is either overstated or glaringly obvious and therefore the argument largely pointless.  More important, having been, many years ago, a decent or better analyst almost entirely due to my ability to ask the right questions, I have three questions regarding Apple’s cash disbursement plans and, to a lesser extent, the bond deal that was part of it.  It would be difficult to answer “yes” to more than one of them:

1.      Is Apple returning all this cash (at the current rate of cash generation, $100 billion comes to about two years worth of cash flow from operations) to shareholders because it has run out of good ideas, products, or companies in which to invest?

2.      Will Apple miss out on otherwise terrific investment opportunities because it is getting on the “deliver yield no matter what the cost” bandwagon?  (See my 4/29/13 piece, YEAH, THE BIG DIVIDEND PAYERS ARE GETTING RICH, BUT…)

3.       What is Apple’s motivation for borrowing all this money?  

a.       Is it because, as the company claims, all Apple’s cash is housed overseas and would therefore be subject to a big tax bill if repatriated to pay dividends?

b.      Is this just an apparently astute financial move, borrowing money for a long time at very cheap yields? 

c.       Or is Apple borrowing the money so that it can return the $100 billion to shareholders and still have plenty of cash on hand to invest wisely and nimbly?

At the expense of being obvious (But see my 4/16/13 post S&P YIELDS VS. BOND YIELDS:  I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS), if the answer to one of the first two is “Yes,” this is not a good thing for Apple.   If the answer to the third question is b, c, or some combination of the two, this could be a good thing for Apple.

As I said earlier, I am no Apple expert and therefore have no idea whether Apple stock is rich or cheap at this juncture.  I am only suggesting some questions those pondering maintaining or initiating an AAPL position should contemplate.