Apple Inc. Euro Bonds Safer Than The U.S. Treasury

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As we reported on Monday, Apple Inc. (NASDAQ:AAPL) has issued Euro-denominated bonds to raise €2.8 billion. The tech giant issued €1.4 billion of bonds due 2022 that would yield 1.082% interest. Another €1.4 billion of 12-year notes (due 2026) carry an interest rate of 1.671%. By comparison, the 10-year U.S. Treasury notes have an interest rate of 2.33%.

Apple takes advantage of record low rates in Europe

Apple said in an SEC filing that the interest will be paid every year on Nov.10 starting 2015. It’s the first time the Cupertino giant has issued bonds in a currency other than the U.S. dollar. Apple was able to get such low rates due to two reasons. One, the iPhone maker is rated Aa1 by Moody’s and AA+ by Standard & Poor’s. Apple’s strong credit rating reassured bond investors.

Two, borrowing costs in Europe have fallen to a record low. Ten-year German bunds yield a meager 0.84%. Apple’s bond offering came at the right time to take advantage of the low interest rates. Last year, Apple sold bonds worth $17 billion, followed by another $12 billion bond offering in April this year. RBC Capital Markets analyst Amit Daryanani said in a research note that the bond sale was done by a “U.S.-based entity.” That means Apple will get the proceeds of the offering in the U.S.

Apple won’t have to pay repatriation taxes on bond sale proceeds

Daryanani said there should be no repatriation issues with these proceeds. Apple will use the proceeds on stock buybacks and dividends. The company has more than $155 billion in cash. But $137.1 billion (or 88%) of its total cash reserve is held overseas. If the company brings part of its cash to the U.S., it will be subject to repatriation taxes. So, raising funds in a bond offering and bringing them to the U.S. without any repatriation taxes was a better alternative.

RBC Capital Markets said Apple will update on its capital allocation program sometime in March/April next year, when it could increase its dividend and stock buyback. In the last two years, Apple has returned more than $90 billion to shareholders. RBC Capital Markets has an Outperform rating on the stock with $115 price target.

Apple shares gained 0.46% to $109.10 in pre-market trading Wednesday.

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