Apple Inc. (NASDAQ:AAPL) issued $17.0 billion of bonds, the largest investment-grade corporate bond offering on record. The six-part offering includes two floating-rate notes worth $3 billion and four fixed-rate notes worth $14 billion, with maturities ranging from three to 30 years.
Apple Inc. (NASDAQ:AAPL) intends to use the net proceeds for general corporate purposes including the repurchase of common stock and dividend payments related to its $60 billion share repurchase authorization and 15% dividend increase announced on April 23.
Analysts at Goldman Sachs are adjusting their estimates to reflect Apple’s debt issuance. For their prior forecast, made without the benefit of the details of this offering, analysts at the research firm assumed Apple Inc. (NASDAQ:AAPL) would gradually add debt at a pace of $8 billion per year. Firm’s estimates now integrate today’s $17.0 billion bond sale. As for share repurchases, analysts continue to assume Apple Inc. (NASDAQ:AAPL) buys back stock in a near linear fashion through 2015, though the company could front-end load some of its repurchases due to the size of the debt offering. Analysts at the firm now forecast EPS of $38.45 in FY2013, $41.30 in FY2014 and $47.86 in FY2015, from $38.60, $41.59, and $48.00, respectively. The change arises from research firm’s updated assumptions around the company’s capital structure and resulting net interest expense. Analysts estimates for revenues and other operating metrics are unchanged.
Apple’s Capital Allocation Program
On April 23, Apple Inc. (NASDAQ:AAPL) announced a substantial expansion of its capital allocation program, expecting to return a total of $100 billion through the end of calendar 2015. The new plan expanded the current share repurchase authorization to $60 billion, from $10 billion previously, leaving Apple Inc. (NASDAQ:AAPL) with over $58 billion left in buybacks through 2015. This remaining authorization represents approximately 14% of the company’s total market capitalization, and is the largest corporate buyback in history. Alongside the boost in the share repurchase authorization, Apple Inc. (NASDAQ:AAPL) increased its annual dividend by 15%, bringing the annual payout to approximately $11 billion and the current yield to 2.8%. In addition, the company plans to use $1 billion annually to settle vesting RSUs.
Since $102 billion of Apple’s net cash and investment balance is overseas, the company had also announced plans to issue debt to help fund its planned capital allocation program during its April 23 earnings call. However, management disclosed few additional details about its planned debt issuance at the time. Analysts at Goldman continue to believe that financial leverage and Apple’s hefty cash flows could allow Apple Inc. (NASDAQ:AAPL) to continue increasing the dividend and buyback over time as well. Most importantly, the use of debt leaves a healthy net cash balance for the company to deploy on capex and future acquisitions. They believe Apple Inc. (NASDAQ:AAPL)’s capital allocation program provides a healthy downside buffer for the stock in the near term, and it could provide a powerful accelerant to the share price recovery as product and earnings momentum recovers.
Apple Inc. (AAPL)’s Valuation
Goldman Sachs reiterate their Buy rating and maintains 12-month target price of $500 for Apple Inc. (NASDAQ:AAPL). The target price is based on a P/E multiple of 13X on firm’s updated CY2013 EPS estimate of $37.93 ($38.11 previously).
According to Goldman’s report, key risks include delayed product cycles, supply chain difficulties, product price erosion, and a slower pace of product innovation.