This week, Apple (NASDAQ:AAPL) sold $17 billion in bonds, to raise some of the funds for a $50 billion buyback program. Selling bonds to raise cash for a businesses operations is something that most major companies do when implementing a major expense or buyback. Businesses use this strategy for the same reasons people with $1-2 million in cash might take advantage of low interest rates to finance the buying of a house, a major construction project, or the buying of a car, rather than spending money they have sitting in the bank, or tied up in other investments. Borrowing money when interest rates are low is a valid, legal, and intelligent way to finance a major multi billion dollar projects. The Fed implemented QE3 to keep interest rates low, so banks would lend money, companies would invest more, and businesses would hire more.
Bonds are good for everyone
Bonds are a great mechanism for companies that issue them, and the investors who buy them. Companies are able to obtain cash that will be used for a large investment, and conservative investors who might otherwise earn close to nothing by putting their money in the bank are able to make some money, with minimal risk required. For conservative, fixed income investors with low risk tolerance, Apple bonds are a safe, and reliable way to put money to work. Apple borrowing $50 billion over the next year with the aid of the bond market is well within the spirit of the law, and will likely benefit Apple and the economy long term. Pundits have missed the reality that bonds are a good thing, and have accused Apple of using this bond offering as a "tax avoidance" strategy, to avoid paying the $9 billion tax bill Apple would pay if Apple repatriated $50 billion to the United States from overseas to cover this investment. These pundits miss the possibility that Apple might not have $50 billion that it can bring back, even if it wanted to. . Since Apple doesn't pre-announce its future plans, it is impossible to know if Apple needs its $150 billion for a major project that we simply haven't been told about yet. Any assumption that Apple has no plans to use its cash is simply conjecture. Furthermore, Apple is a private company, and like any other business, intends to maximize its earnings. By issuing bonds, Apple can both return cash to shareholders, and invest in growing the company. The additional money will allow Apple to invest in the company (Apple, and its suppliers), to fund new research, and expand manufacturing capacity, benefiting shareholders even further in the long term. Borrowing money when interest rates are at all time lows, is a sane, and legitimate way to invest that everyone with good credit is able to do, and should do.
Apple can have its pie and eat it too
If Apple buys back $50 billion of its stock at $430, and Apple's stock retests its high of $700 in 2013, Apple will increase its total equity by $8 billion. This money will be located in the United States, and can be used to invest in the United States without Apple having to pay any additional taxes. Apple could use this $8 billion to build facilities, or hire employees, and the Federal government would get $2-3 billion, depending on Apple's tax rate. Furthermore, Apple can spend the money that it has abroad on Research and Development, and employment abroad, such as a new Research and Development center that Apple is opening in Shanghai this summer. Apple increasing Research and Development, employment, and output in factories abroad would result in increased employment in the United States, as a result of increased sales, and greater tax revenue for the Federal government, due to a larger tax base, and could potentially make a dent in the United States $16 trillion deficit.
Apple has done nothing wrong by issuing debt to cover its buyback program and dividend increase. Interest rates are being kept low for a reason, and Apple is capitalizing on this opportunity, in a way that any company or person with very good credit is able to. Is this not the spirit of capitalism? Although it's possible that Apple has no plans to put its cash to work, and intends to be the "Scrooge Mc Duck" of the technology world, and create the worlds largest money pool, I don't think this is the case. As Tim Cook has stated, Apple is not cheap, has no objection to a multi billion dollar acquisition, and is more than willing to invest in projects or companies that are worthy, and will create meaningful value.
Apple has done nothing to deserve the criticism it is receiving for its capital management strategy. Apple has created 600,000 American jobs in the United States, is making gobbles of money, and is very likely to announce a few surprises in the near-medium term. The double standard being Applied to Apple is beyond ludicrous. Apple is acting as an intelligent business, supporting the American economy and its shareholders, and creating gobbles of shareholder value. Any rational business in Apple's position would sell bonds to buyback shares.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.