While Apple's earnings report last week left little to be desired, one of the more notable observations was that the company's cash hoard, relentlessly rising until now, had seen its first quarterly dip since Lehman, declining by $8 billion from $158.8 billion to $150.6 billion. Which was to be expected: since the technological company has not had much success with "growthy" innovation since the arrival of Tim Cook, it has been forced to become an activist investor's favorite piggybank, buying back and dividending record amounts of cash. In fact, perhaps the most notable feature of its earnings release was that AAPL would boost its buyback plan by 50% to $90 billion.
One small problem: as everyone knows, when it comes to shareholder friendly actions, Apple can only rely on its domestic cash hoard. The foreign cash, unless it is repatriated and subject to substantial tax withholding, is for all buyback and dividend purposes, meaningless. Also, as most know, starting in 2010, there was a dramatic divergence between the amount of cash AAPL generates domestically versus how much it has in offshore bank accounts.
Which brings us to AAPL's most recent cash update between domestic and foreign holdings. Because while total cash may have dipped by $8 billion, foreign-held cash actually rose by $7.8 billion. Which means that Apple's domestic cash tumbled. By how much? The chart below has the answer.
As that highlighted yellow bar shows, AAPL domestic cash tumbled by a record amount, plunging by nearly half, or $16 billion to be specific, from $34 billion to $18 billion.
What this simply means is that after making the history books with the biggest ever, $17 billion bond offering 12 months ago, Apple is about to issue a whole lot more of debt. Sure enough, as FT reported moments ago, AAPL is preparing another $17 billion in debt, to follow the $17 billion it issued last year, which would make it the joint largest bond offering in history. Again. From the FT:
Apple is preparing the groundwork for another blockbuster debt sale in the region of $17bn that could rank as the second-largest corporate bond sale of all time.
Apple plans to use proceeds from the debt sale to fund the buyback rather than tap its $150bn cash pile. About $130bn of that cash is held overseas, 88 per cent of the total, and returning it to the US would lead to a tax charge of up to 35 per cent.
A foreign debt sale would probably target the eurozone, where interest rates are lower than in the US, and diversify Apple’s debt investor base.
During Apple’s quarterly results call last week, Luca Maestri, Apple’s incoming finance chief, warned that repatriating offshore cash would incur “significant” tax consequences.
Apple was likely to raise “an amount of term debt financing similar to what we issued in 2013”, he said, adding that preparations had also been made to tap the commercial paper market for short-term liquidity.
However, considering the less than smashing success of its first record bond offering (the 2043s are trading at 90, the 2023 at 93), this one may be a little more problematic to pull off, and AAPL may have no choice than to boost the cash coupon to find enough buyers who will likely be unable to flip the bonds on the next day.
The goods news for Apple is that unlike IBM, whose debt/capital ratio soared to the highest ever following its surge in debt-funded buybacks, it still has a lot of balance sheet capacity before it has to be worried about a debt downgrade to fund its returns to shareholders. The bad news, is that unless the company finds a way to boost domestic cashflow, or somehow put the offshore cash to good use, it won't be too long before Apple too, has no choice but to do what every other company is doing in the absence of top-line growth: issue record amounts of debt just to keep shareholders happy.
Needless to say, this strategy works as long as rates are low, but once rates start rising, it stops working.