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2020-05-05

Apple borrows on the cheap for dividends, buybacks

Image:-Apple product

On Monday, Apple Inc (AAPL.O) capitalized on emergency measures taken by the Federal Reserve in response to the coronavirus outbreak to issue its cheapest bonds in years, making it the latest blue-chip company to fund stock buybacks and dividends.

Apple's offer illustrates how companies with the best credit ratings boost shareholder returns by tapping on the cheap debt made available through the credit markets backstop by the Fed. Apple shares in the S&P 500 Index. SPX are virtually flat year-to-date compared to a 12 per cent drop.

The technology firm raised $8.5 billion by selling four different maturing bonds ranging from three years to 30 years. According to Refinitiv IFR data, it sold a $2 billion three-year bond and a $2.25 billion five-year bond with coupons of 0.75 per cent and 1.125 per cent respectively, the lowest rates the company has paid on such duration bonds since 2013.

According to the Refinitiv data, the coupons on Apple's 10-year and 30-year bonds were also the lowest that the company has paid in the last few years.

Apple said in a regulatory filing that the funds will go towards general corporate purposes, including share repurchases and dividend payments. Apple spent $38.5 billion to repurchase its own stock during the six-month period ending March 28.

In March, the Fed slashed interest rates to near zero and said it would act as a last resort buyer on the investment-grade corporate bond market, in a bid to help cash-strapped firms access capital markets roiled by the pandemic's economic impact.

Although the Federal Reserve has yet to buy a single corporate bond, the intervention has fuelled record issuance by financially-needed companies such as Boeing Co (BA.N), Marriott International Inc (MAR.O) and Ford Motor Co (F.N).

The policy also allowed financially strong companies such as Apple, which as of the end of March had just over $40 billion in cash, to reduce its capital cost to shareholders' benefit.

Drugmaker Biogen Inc (BIIB.O) and U.S. health insurer Anthem Inc (ANTM.N) also sold new bonds at low rates over the past week, some of which the companies said were partly to fund share buybacks.

Joint book-running managers on the Apple bond offering were Goldman Sachs & Co, BofA Securities, JPMorgan and Morgan Stanley.