Apple Inc. (AAPL) Long Term Problem Demonstrated In One Chart

Apple’s Long-Term Problem In One Chart

By: George Trager, Financial Markets Enthusiast, Editor of

Apple announced yesterday that it was raising $12 billion in new bonds for the purpose of financing its capital return program. This might seem strange given the fact that the company had $215 billion in cash and cash equivalents as of the end of the most recent quarter. However the primary driver of the debt issuances of the company in recent years has been the fact that $200 billion of the company’s cash is generated outside of the United States and therefore, were the company to repatriate this cash, it would have to pay taxes. Therefore the company in recent years has chosen to raise debt locally to fund its capital return programs.

Longer-term however, the above chart depicts the problem – the vast majority of Apple’s incremental revenue in fiscal 2015 was generated outside the United States, 73% to be exact.

That figure would have been higher if the dollar hadn’t strengthened more or less across the board last year. When you combine this with the fact that smartphone penetrations are much lower in geographies outside of the Americas, it’s fair to say that going forward an ever greater percentage of Apple’s revenue growth will be generated by regions outside of the United States. Debt is currently cheap, so the opportunity cost of levering the balance sheet is not as punishing, but in the long term that could change, particularly if revenue and profit growth continues to slow and at some point starts declining thereby stressing leverage ratios.

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However, the upcoming election could be a game changer. Repatriation of capital has been discussed by each of the presidential candidates with the expectation being that were a republican to get elected this fall, they would enforce a tax holiday enabling companies like Apple to repatriate cash without paying taxes.