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Essay: Apple’s debt and share buyback

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  • Subject area(s): Business essays
  • Reading time: 8 minutes
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  • Published: September 8, 2021*
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  • Words: 2,324 (approx)
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  • Apple's debt and share buyback
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Debt can be a cheaper way for a company to finance their future goals. As stated by Terry Lambert (former Apple employee), it arises for two reasons as seen below (Lambert, 2017)

  • Interest on debt is tax deductible, meaning that it provides a tax shield; you don’t get this if you finance your day to day operations with cash on hand
  • The premium you pay on acquiring debt is less than you pay on the same amount of equity; this is because it’s a better investment (safer) for the investor.

Regardless of Apple’s cash holdings, it still retains debt. Even though Apple has locations outside of the USA, while it might be seen as a benefit, it really might be costing the company more. When income is earned in another country it is taxed there prior to it being brought back into the USA (Lambert, 2017). Therefore, Apple is forced to pay tax twice, one in the originating country, and secondly in the USA, which can be costly.

Apple is playing this game but with much bigger numbers. It’s better for them to take out a loan then to spend money they already have. The richest company in the world has continued borrowing increasing amounts of money from all over the world. We’ll begin with a quick look at the company’s usage of debt beginning in 2013 and including estimates for this year. Apple Inc. total debt increased from 2013 to 2017 but then slightly declined from 2017 to 2018.

In USD$ Sep 29,2018 Sep 30,2017 Sep 24,2016 Sep 26,2015 Sep 27,2014 Sep 28,2013
Commercial paper 11,964 11,977 8,105 8,499 6,308 _
Current portion of term debt 8,784 6,496 3,500 2,500 _ _
Term Debt, Excluding current Portion 93,735 97,207 75,427 53,463 28,987 16,960
Total commercial and term debt 114,483 115,680 87,032 64,462 35295 16,960
(Dybek, 2018)

Debt was beneficial to the growth of Apple Inc. Debt Capitalization.

The second component of capital structure is Debt, representing how much the company owes to creditors (Carmichael, 2016).

In USD$ Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013
Debt to equity 1.07 0.86 0.68 0.54 0.32 0.14
Debt to capital 0.52 0.46 0.40 0.35 0.24 0.12
Interest coverage 23.50 28.59 43.15 99.93 140.28 369.79
(Dybek, 2018)

Sample equation below,

Debt to equity = Total debt ÷ Shareholders’ equity
= 114,483 ÷ 107,147 = 1.07

Apple Inc.’s debt-to-equity ratio, Debt-to-capital ratio and Interest coverage ratio deteriorated from 2016 to 2017 and from 2017 to 2018. These ratios provide the financial position of the company. The raising of a company’s default risk can be affected by the accumulation of debt.

2. Provide examples and/or perspectives

Apple Inc is not the only company that has increasing debt, other companies such as Amazon, Netflix, Google, Facebook and more are also making a significant contribution to the “credit bubble” they’re now calling (Pearlstein, 2018). The common reason that companies get more debt is the repurchase of shares using borrowed money, that brings the corporate debt high from 29.8% since 1952 to 73.1% on 2017 which is at high record and still rising (Pearlstein, 2018). Companies are sacrificing future growth for present consumption, they are returning money to shareholders. Corporate America has turned itself into one giant leveraged buyout. Another cause of booming buyback is making the pool of stock shrink. In addition, the result of all this corporate borrowing is that more than a third of the largest global companies are now highly leveraged — that is, they have at least $5 of debt for every $1 in earnings — which makes them vulnerable to any downturn in profits or increase in interest rates, stated by Daniel Arbess of Xerion Investments (Pearlstein, 2018).

According to S&P Global rating, because of a decade of low costs on borrowing US companies are sitting on $6.3 trillion of debt (CNN Business, 2018). This is a risky time to owe a bunch of money. The borrowing costs are finally rising after years of very low interest rates. When debt comes due, this will make it more expensive for companies to refinance their debt. S&P analyst Andrew Chang wrote in a report, the “massive amount of debt” that American companies have piled on “should concern investors as we enter the late innings of a credit cycle in a rising rate environment” (CNN Business, 2018). Although the tax law has improved corporate balance sheets, it’s also sparked a record-setting wave of share buybacks and debt-fueled acquisitions. S&P said it believes Corporate America has reached its peak for cash hoarding. That’s because companies are rewarding shareholders while adding debt because of the “lure of cheap money.”

“We believe we are now entering the era of the Great Unwinding,” Chang wrote (CNN Business, 2018). Companies that have strong balance sheets can afford to return a bunch of cash to shareholders. The rest? Not so much. S&P found that the riskiest category of borrowers — with a rating known as junk — have never been more leveraged than they are right now.

B. Share Buybacks

1. Assess the utility of the share repurchase program from the perspective of Return of Investment

Apple has repurchased shares paying high per share. Apple’s financial model emphasize cash flow over profit, making Apple not profitable in the process. In 2017 it generated $16 billion more in operating cash flow than profits (Desai, 2018). During which, it has to fund extract funds externally which is the process of stocking good and collecting revenues from customer and using it to pay suppliers. Therefore, Apple generates more cash from its operations. For corporations with excess cash, they can make capital expenditures or invest in other ways into their existing business otherwise pay dividends to the shareholders. They can also acquire another company or business or use the money to repurchase their own shares called a stock buyback. Share buybacks are a most flexible way of returning cash to shareholders such as dividend. They think that shares are undervalued thereby reducing the number of outstanding shares. which in principle boosts demand for the stock and its price by decreasing supply. But individual shareholders are the market, that stocks are not collapsing may be due to companies’ demand for their own shares.

Apple’s debt is traditional. It increases free cash flow. Increasing debt for Apple is a concern. It had no debt before undertaking the debt. Apple has $115 billion of debt outstanding (Desai, 2018), activist investors are pushing harder than ever for companies to repurchase and boost dividends. Finally, share buybacks misrepresent earnings which can harm shareholders’ interests.

Apple Inc board hiked it repurchase authorization by $35 billion, to $175 billion, in April 2017, when its stock was flying high, the company activist investor Carl Icahn’s call for big buybacks (Mintz, 2017). Now, it has seen sales falls. The quarterly Buyback includes ten sectors that rack up positive buyback ROI, against 14 that show negative returns.

2. Has the share repurchased been beneficial to the long-term health of Apple?

Why do company buy back shares? At their most basic, buybacks are one of two principle methods through which a company can reward its shareholders with their excess cash flow; the other is dividends (Tonner, 2016). Also, companies can choose to repurchase outstanding share for number of reasons. Repurchasing shares can help a business reduce its cost of capital, benefit from temporary undervaluation of the stock, increase EPS, consolidate ownership, and share buyback carry tax advantage May apple announced repurchase $100 billions of share and so far in 2018 this is tripled the share repurchase on the half of last year. With the recent corporate tax reform, this will allow Apple to get back its overseas cash in a much lower tax rate. Apple has said that it wants to reduce its net cash balance to zero, a goal it will accomplish through share buybacks, increased dividend payouts, acquisitions, and investments into research and development (Clover, 2018). According to Apple’s report for its first quarter on 2019, their Earning per share went high up to $4.18, up 7.5 percent, setting a new record (Apple, n.d.)The share repurchasing program helped in achieving this. Apple also generated strong operating cash flow of $26.7 billion during the December quarter. Luca Maestri, Apple’s CFO, stated the they have returned $13 billion to their investors through dividends and share repurchases (Apple, n.d.). To answer the question has the share repurchase been beneficial to apple, based on their report for the first quarter, yes, the share repurchases helped apple even though revenue declined by 15%.

Apple is planning to hire more people. Apple’s full-time employees grew up from 80300 to 123000 worldwide. Company added over 29000 employees in the US 68% of global total (Hansen, 2018). Apple could use the cash generated from business to hire more employees. However, it can turn out to be bad business plan. Apple shares owned by shareholders should act in their best interests. Growing the business and hiring people is beneficial for the shareholder if company earns returns on investment than the return of the firm is greater than shareholders. If not, then it is throwing away its shareholders money instead of adding value.

This is benefit in the short run. Stock buybacks results wealth inequality and wage stagnation among the worker. Workers are also consumer in the economy affect the spending which is the boom for the economic growth and job opportunities. It affects the health of the company as it hinders the health of the economy

3. Provide ideas/examples as to the alternate usage of this capital expenditure.

Share Repurchase can be a better idea than paying dividends. For example – Apple is giving $100 billion as buy back instead of giving to shareholder in the form of dividend. Here aggregate value of stock remains same. The value of Apple’s share after giving to shareholder is same whether it is dividend or buyback. The difference here is shareholders tax has to be paid on the $100 billion on the buyback or dividend. In case of repurchase shareholders not essentially sell their stock to avoid taxes. So, they have a choice to sell or not to sell the shares. So, stock buyback is equal to paying dividends.

Similar to a dividend, a stock buyback is a way to return capital to shareholders. While a dividend is effectively a cash bonus amounting to a percentage of a shareholder’s total stock value, however, a stock buyback requires the shareholder to surrender stock to the company to receive cash. Those shares are then pulled out of circulation and taken off the market.

C. Ethical

1. Apple’s Employees

Share buybacks can be concerning for employees in the company, in particular Apple. When a company chooses to repurchase their own shares, it can show many different signs. In some cases, it can be that the company wants to regain more control, therefore by repurchasing shares they can regain that lost equity. While having a company regain control can be seen as a positive outlook, when it comes to the employees’ power of view, it can also be negative. Employees could begin to wonder if Apple begun to lose control in the first place. Another sign of share repurchase is that there is no future growth plans that require the equity, “When a company chooses to spend its cash on its own shares rather than reinvesting it into the company through capital expenditures or acquisitions of smaller competitors, it signals to investors that there are not many other profitable opportunities to grow the business” (Coleman, 2018). Overall, share repurchase doesn’t always have a positive outcome as “these actions disproportionately favor senior management and direct funds away from more productive purposes, such as corporate investment, job creation, or increased worker pay.” (Hansen, 2018).

2. The Community at Large

Similarly, to the benefit to employees, the benefit to community members is not entirely positive either. While a company regaining control can be a good sign, the ripple effects of the repurchases to the community is not so positive. When a company chooses to repurchase shares, the remaining shares “becomes more valuable because each share now holds a greater percentage of ownership in the company” (Coleman, 2018). An increase in the equity of each share means a greater dividend for those who remain owners, but it also decreases the number of shares available. This is where the “The laws of supply and demand go into effect” (Coleman, 2018). As a result, for those who already owned a share prior to Apple repurchasing theirs, they received the benefit of increase dividend. But for those who did not own one before, if they want to purchase one now, they must pay at the inflated rate caused by the repurchase.

3. Impact income inequality in any way

Share buybacks does not reflect a positive impact on income inequality. Since companies use their money to buy back stock, it means they are not using it to “retain, retrain, hire, increase benefits, build new factories, or increase wages” (CNN Business, 2018). With a company such as apple, when they choose to spend their money on share buybacks, it decreases the money in to the workers pockets. Rather “the gains only go to those invested in the stock market, disproportionately the richest…” (CNN Business, 2018). Therefore, it is hard to see an ethical benefit to share buybacks in relation to income inequality. It creates a worse situation for the community. The poor get poorer, and the rich become richer.

Overall, it shows that when it comes to share repurchase the only people who benefit are those already invested, and those already rich. It has a negative effect on the working class, general community members and the balancing of income inequality. It causes an overdramatic inflation in share price, as a result.

Conclusion

Apple’s stock buyback is equivalent to paying a dividend to shareholders. Apple has done fair to its shareholders by reducing tax through the cash distribution with the share repurchase program instead of distributing the dividend. Apple’s aggressive buyback strategy enriches the investors. However, despite Apple’s record profit and cash flow a third of the shares are being repurchased with borrowed money accumulating its debt very high in relation to its profit assets and the overall size of the economy (Pearlstein, 2018).

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