Apple’s strategy reveals how companies that have good credit ratings are enhancing shareholder returns by exploiting cheap debt availed by the Fed’s backstopping of the credit markets. The company’s shares are majorly flat year-to-date versus the 12% drop in the S&P 500 Index. The tech behemoth raised US$8.5 billion through the sale of four different bonds that have maturities set between three and 30 years. It sold a US$2 billion 3-year bond and a 5-year US$2.25 billion with coupons of 0.75% and 1.125%, respectively. These are the lowest rates Apple has paid bonds with such durations since 2013, according to the Refinitiv data. The coupons set on Apple’s 10-year and 30-year bonds were also considerably low based on the Refinitiv data. Funds will go to finance general corporate purposes, including dividend payments and share repurchases, as explained in Apple’s regulatory filing. The company spent US$38.5 billion to repurchase its stock in the six months that ended March 28.
The Fed Policy
In March, the Fed cut interest rates to near zero. At the time, it said that it would become the buyer of last resort within the investment-grade corporate bond market. The Fed would activate buying aiming to assist cash-strapped companies to access capital markets affected by the economic crash from the health crisis. Although the Federal Reserve is yet to purchase any corporate bond, the intervention has resulted in record issuance by companies who require funding like Marriott International, Boeing, and Ford Motor. This policy has enabled financially stable companies like Apple to reduce capital costs to benefit shareholders. Apple had about US$40 billion in cash as of the end of March 2020. Last week, Biogen and Anthem sold new bonds at a low rate to partially fund share buy-backs. Morgan Stanley, BofA Securities, Goldman Sachs, and JPMorgan were the joint book-running managers on the Apple bond offering.
