Apple Inc. (NASDAQ:AAPL) with $137 billion in cash and cash equivalents should borrow money?! Barclays debates this issue in a report released yesterday (Barclays also reiterated its belief in the report that the Apple Inc. (NASDAQ:AAPL) iPhone 5 has the best camera of any iPhone yet). The tech giant does not need the money, but they could issue debt at low cost. Issuing the debt would remove any need to use overseas cash which would be taxed at 35% in certain circumstances. We summarize (in many words) Barclays key points below.
Time to Borrow?
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Barlcyas notes the pressure from shareholders and a significant amount of excess cash on the balance sheet (30% of cash on balance sheet is domestic) is making Apple Inc. (NASDAQ:AAPL) consider a much more significant shareholder return strategy. Currently, Apple has a three-year $45 billion capital return plan in place that has already been depleted by $10 billion.
Barclays believes that Apple should now be strongly considering tapping the debt markets to “borrow against” the significant overseas cash position. This way, Apple could maintain flexibility to make acquisitions and not incur a tax hit for repatriation—all for very low current borrowing costs . As a result, Barclays estimates that Apple could easily double the size of its three-year plan, among the many options it has. However, the analysts still do not expect Apple Inc. (NASDAQ:AAPL) to issue special dividend but expect an updated and thoughtful long-term plan over the next few months.
Even without borrowing, Apple Inc. (NASDAQ:AAPL) should have room to increase its total cash outlay for dividends and buybacks over the next three years. However, borrowing could really change the situation, adding meaningful upside or flexibility to that level. Should Apple tap the debt markets, the company could borrow up to $50 billion technically “against” existing international cash if it wanted to.
Even though this issuance could be very large, the market would likely back such an issuance at a very attractive rate for Apple considering the debt could still be repaid with existing international cash balances after assuming a 35% tax rate for repatriation. Based on precedent set by other maturing companies in the tech space, like IBM, Barclays believes that Apple would be able to borrow at very attractive rates – perhaps below 2%.
Based on their detailed analysis around borrowing, Apple Inc. (NASDAQ:AAPL) probably has the potential to double its level of capital returns if the company makes complete use of its balance sheet.
First, Apple could sustainably boost its dividend to more than $14.75 which would put the dividend at a 3.5% yield based on current price. This raise could be accomplished with only domestic free cash flow at this point – essentially a domestic free cash flow sweep for the next couple of years. This yield would be attractive considering it would take Apple’s yield above that of Cisco and other bellwethers. If Apple could achieve a yield comparable to other blue chip companies, Barclays thinks that Apple could increase to the $575 level.
Second, they believe Apple has the capacity to increase its buyback program at the same time by $30 billion over three years (up from the existing $10 billion share repurchase program). Over the next three years, an increase of this magnitude ($10 billion per year) could add an average $0.65 in added EPS per year.
Barclays is running all their analysis under the assumption that Apple Inc. (NASDAQ:AAPL) would want to maintain at least $10 billion per year in domestic cash through the forecast period – which could be reserved for M&A and general corporate purposes.
In March 2012, Apple Inc. (NASDAQ:AAPL) unveiled a new dividend and share repurchase program. The company started a quarterly dividend of $2.65/share ($10.60 annualized), which was first paid in 4QFY12 and consumes about $10 billion in cash per year. At that time, Apple indicated it would periodically discuss updating the dividend but no time frame was set.
The company first paid a dividend in June 1987 and stopped payments in December 1995. In addition, the Board of Directors authorized a $10 billion share repurchase program that began in Apple’s FY13. The repurchase is expected to be executed over three years primarily to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs. Combined, Apple expects these new programs to utilize about $45 billion of domestic cash in the first three years. Apple had about $43 billion of domestic cash as of its December 2012 quarter-end.
Regardless of how the plan eventually unfolds, something is likely to occur soon, given recent efforts by activists. On February 7, Apple Inc. (NASDAQ:AAPL) released a statement regarding a recent effort by David Einhorn to rally support against a proposal to eliminate the company’s capacity to issue “blank check” preferred stock.
In the company’s response to a call for preferred shares, Apple reiterated its current capital return program of $45 billion over three years, noting that $10 billion will have been distributed by the dividend payable date of February 14. Apple noted it would take under consideration the proposal from activist shareholders.
Apple also clarified that the proxy proposal also is meant only to curb management’s ability to issue stock without shareholder approval – the change to Apple’s articles of incorporation would not forbid the company from issuing preferred stock completely. Though the proposal was not passed at the latest shareholder meeting, the analysts expect a similar proposal to re-emerge at the request of key shareholders in the near term.
Barclays believes that a larger cash return program is needed given Apple Inc. (NASDAQ:AAPL)’s share price volatility. Furthermore a new initiative could help smooth the transition from “growth” to “value” investors, which is occurring due to Apple’s slower sales momentum.