What Was Left Unanswered In Today's Apple Record Bond Offering

Tyler Durden's picture

When people talk AAPL, especially defensively, the first thing they note is that while the growth prospects may be dimming, the company has a massive $145 billion (as of March 31, 2013) in cash and equivalents. Surely, this amount has to be netted out of any P/E calculation making it appears so very cheap, depending on what forward Earnings number one uses. Well, as today's bond offering showed, Apple's cash "here" is not the same as Apple's cash "there" and by here and there we mean domestic and foreign cash. In fact, the only reason Apple, which has a total cash on its books that is larger than the GDP of most countries (most of which is invested in various corporate and sovereign securities but that is irrelevant for now), had to do this bond deal, is that as we showed a year ago, a majority of its cash is effectively non-recourse due to prohibitive taxation requirements that the company would face upon repatriating said cash. Which also means that going forward all calculations that praise the company's cash will also have to haircut the offshore held cash as it is not fully recourse to the US-headquartered company.

So just how much is AAPL's offshore cash?

Well as of the most recent quarter a record 70.7%, or $102.3 billion, of its total cash was held in offshore jurisdictions! This means "only" $42.4 billion is available domestically for balance sheet acrobatics such as satisfying the recent screams for shareholder friendly actions. We say only because don't forget: now that Wall Street is a value company and has to dividend and buyback billions every quarter to satsify its unappeased shareholders, this cash won't last too long...

All of this is known, or should be known by the Apple fanatics, and certainly those who just gave AAPL cash for 30 years in exchange for a sub 4% coupon.

What, on the other hand, seems to be known by very few, is what appears to be a very disturbing trend in the distribution of cash domestically vs cash abroad.

As the chart below shows, when it comes to offshore-held cash, AAPL is indeed a cash cow. And with the bulk of the company's growth prospects, and ever more so, sales abroad, this makes intuitive sense. As noted above, AAPL reported $102 billion in cash abroad, an increase of $8 billion in the quarter. 

This is terrific news... if only the company could dividend, buyback or engage in any other shareholder friendly action with this cash. It can't.

How about cash held domestically? Well, as can be seen in the red bar below, domestic cash has not only stagnated in the $30-40 billion area for two years, it actually declined in the most recent quarter. And yes, this is the cash that Apple has full recourse to, and which it uses to make dividend payments out of, and to fund stock buybacks.

So yes: today's bond offering was purely driven by tax considerations, but what will happen if in the future the domestic cash flow creation continues to stagnate as the US market contracts, even as the Company's cash outflow obligations increase with every passing quarter and ever more vocal shareholders.

In summary: congratulations to Apple for its record $17 billion bond offering today. Perhaps the real question, however, is when is the next one?