Get Ready For Apple iBonds

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Apple announced today that it would crank up its quarterly cash dividend by 15% to $3.05 per share, and it would expand its share buyback plan by $50 billion to a total of $60 billion.

Perhaps the most interesting thing about this ramp up in its capital return plan is that it will finance some of it by borrowing money.

"In conjunction with the expanded return of capital program, the Company plans to borrow and expects to announce more details about this in the near future," said management.

This means that Apple could soon offer bonds.  We'll call them iBonds.

This will be a welcome development for bond investors looking for a higher yield in this extremely low interest rate environment.

Already, S&P has given the company an AA+ rating and Moody's has blessed it with an Aa1 rating.  Both say that their outlooks for the company are stable.

The idea of debt tends to raise the average eyebrow.  But in the corporate world, it comes with numerous benefits.  The cost of debt is cheaper than the cost of equity.  Also, interest lowers a company's taxable income.

Overall, this seems to be a smart move by Apple.

Earlier this year, legendary NYU finance professor Aswath Damodaran discussed this as one of the four things that could make Apple a hot stock again:

4. Behave consistently with your choice : Once Apple makes its stand as a growth or mature company, it has to behave consistently. Thus, if it decides that it is a mature company, it should return more cash to its stockholders, though I think stock buybacks make more sense to its stockholder base now than dividends do. At the moment, with its huge cash balance, it clearly does not make any sense for Apple to borrow money, but somewhere down the road, it has to consider the debt option , since not using it is depriving itself of the tax benefits embedded in the tax code for using debt instead of equity.

Keep in mind, much of Apple's cash is overseas, which is a point CFO Peter Oppenheimer made on Apple's earnings conference call.  And repatriating that cash would come with a steep tax.

As Apple said, more details will come in the near future.

Prospective bond investors, however, can prepare by reading the releases from S&P and Moody's.

Here's S&P:
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Apple Inc. Assigned 'AA+' Corporate Credit Rating; Outlook Stable
  • Apple Inc. recently announced that it will return a total of $100 billion to shareholders through the end of calendar year 2015, more than double the level of shareholder returns announced in March 2012.
  • Apple indicated that its shareholder return plan will include the use of debt to repurchase shares.
  • We are assigning our 'AA+' corporate credit rating to Apple.
  • The stable outlook reflects our expectation that Apple will maintain very modest leverage, significant net cash balances and a commitment to a minimal financial risk profile.

NEW YORK (Standard & Poor's) April 23, 2013--Standard & Poor's Ratings Services today assigned its 'AA+' corporate credit rating to Cupertino, Calif.-based Apple Inc. The outlook is stable. We anticipate that we would also assign this rating to unsecured senior debt that may be issued as part of the shareholder return program, subject to review of the documentation.

"The rating on Apple reflects the company's 'minimal' financial risk profile and 'strong' business risk profile, incorporating market-leading products, a globally diverse customer base and strong profitability," said Standard & Poor's credit analyst Martha Toll-Reed. Although the majority of Apple's revenues are generated in highly competitive markets characterized by rapid technology evolution and short product life cycles, it is our view that Apple's managerial and product innovation capabilities will enable the company to sustain its competitive position. Furthermore, it is our expectation that Apple will maintain "excellent" liquidity, which provides substantial cushion to offset the potential for some volatility in revenue growth and operating earnings.

With annual revenues of $165 billion in calendar 2012, Apple is the largest U.S.-based provider of mobile devices, personal computers, and related products and services. Apple has been an industry leader in the growth of, and market shift to, internet-connected mobile devices (which include smartphones and tablets). The company's core values of innovation, quality product, and quality user experience provide its competitive differentiation. Revenues and earnings are concentrated in iPhone and iPad sales, which accounted for more than 75% of revenues in the December 2012 quarter. However, Apple generates sustained customer interaction through an expanding array of content and service offerings, and benefits from significant customer loyalty. We believe that this, along with its track record of innovation and successful new product development, distinguishes Apple from other consumer device and electronics firms that were unable to sustain their market leadership positions in these rapidly evolving markets. In our assessment, Apple's management and governance is "strong," based on the company's track record of market leadership, effective innovation, and successful performance in relation to its peers.

The stable outlook reflects our expectation that Apple will maintain modest leverage, significant net cash balances, and a commitment to a minimal financial risk profile. While not expected, the most likely cause of a downgrade would result from competitive market conditions that cause a material decline in operating performance and discretionary cash flow, leading to a substantial decline in Apple's net cash position. The potential for an upgrade is currently constrained by our view of Apple's business risk profile, which incorporates highly competitive and rapidly evolving market conditions and Apple's earnings vulnerability to a potential delay in, or modest success of, new product introductions. Therefore, an upgrade would likely depend upon an upward revision to our view of Apple's business risk profile to "excellent," while maintaining a minimal financial risk profile.



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