Why Apple is borrowing money to pay for $60B stock buyback

By , Apr 26, 2013

money

To bolster its stock in the eyes of investors, Apple recently announced it would buy back $60 billion worth of shares. Such a move makes sense – after all, the iPhone maker does have this cash hoard of nearly $150 billion. However, it turns out Apple won’t touch that money, opting instead to borrow the funds.

By borrowing the money, Apple keeps its billions out of the reach of U.S. taxes, saving the corporate giant money while also retiring expensive stock dividends.

You didn’t think there was any altruism involved, did you? The move, however, isn’t without its pitfalls. Moreover, Apple isn’t alone in a corporate game of chess where it’s all about manipulating the tax code, according to a report Friday…

The Washington Post’s Allan Sloan explains Apple would have to pay U.S. taxes if it used cash in overseas bank accounts to pay for the buyback.

At $410 per share, the buy back would shrink Apple’s dividend load by $12.20 per share.

Since dividend payments are not tax-deductible, the company instead will pay interest (which is deductible) of $12.30 per share to borrow the money.

But, wait, there’s more.

Along with saving money on the buyback, Apple boosts it’s earnings per share, a factor always noticed by Wall Street. If U.S. taxes were only less for corporations, they’d drop the tax shelters and come on home, right?

Maybe not, Sloan writes.

With tax rates at 35 percent, it’s considerably cheaper for Apple to borrow money in the United States than it would be for it to repatriate cash held in foreign subsidiaries. But even if the tax rate were only 25 percent, it would be cheaper for it to borrow than to repatriate.

But Apple borrowing a massive amount of money comes with the risk of awashing the company with debt, and that’s exactly what nearly killed Apple in the 1990s.

Tim Cook at D10 (image 005)

Analyst Rob Enderle has his doubts, explaining how Cook’s plan could backfire:

Cook’s stated plan is to eliminate Apple’s cash reserves, increase debt and build a lot more variety into Apple product lines. It reads like he’s planning to return Apple to how it was when Jobs took over – hopefully short of the “nearly bankrupt” part.

He suspects the move could be part of Cook’s exit strategy and a way for the CEO to give himself a “lucrative golden parachute.”

Here’s the quote:

In the near term, though, the buyback will reduce the number of shares in the market.

In addition, offering a huge dividend will entice more people to buy Apple stock. By the law of supply and demand, which a logistics guy like Cook knows backwards and forwards, the end result, regardless of Apple’s performance, should be a massive stock price increase.

And Tim Cook holds a lot of stock.

At any rate, the use of foreign subsidiaries to lower the taxes of U.S. based corporations is mind-boggling.

Start internationally. You create a subsidiary in a low-tax country, such as Luxembourg.

That subsidiary owns intellectual property it licenses to other subsidiaries located in high-tax countries. The royalty fees are tax-deductible, allowing a multinational corporation to move cash from a high-tax pocket to a low-tax pocket.

Tim Cook holds iPad (with Katie Cotton, Jacqui Cheng)

It’s a similar story in the United States. Although Apple’s headquarters are in California with a tax rate of 8.84 percent, it has an office in tax-free Nevada.

“Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year,” the NewYork Times reported in 2012.

As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office – that help cut the taxes it pays around the world.

Although Apple is lauded for its creative use of design and technology to develop devices consumers fall over themselves to buy, perhaps the most important employees are tax attorneys, according to the Post.

So, what’s your position on the subject?

And did Cook make a grave mistake by borrowing the money instead of spending some of Apple’s cash pile to pay for the stock buyback?

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  • http://twitter.com/Choorel Casey Hoorelbeke

    Um…. What?

    • seyss

      exactly

  • Gorgonphone

    typical capitalist greed..

    • http://www.facebook.com/ClintonWeir Clinton Weir

      Capitalism: I want to get you to pay me the most money possible, and you want to get me to accept the least money possible. Simultaneously, you will not pay more than the thing is worth to you, and I will not accept less than the thing cost me.

      Of course there are exceptional cases, but they usually get worked out of the system pretty quickly. In the long run, desire to maximize the value one gets for one’s resources creates abundance. Even as rich as we already are, we are becoming more rich year after year.

      • SEAUte

        the 1st goal of any public corporation is to make shareholders happy. Leveraging the company by buying back stock while increasing debt can do that. Sound like sound financial strategy to me.

  • maverickmax

    well if they went bankrupt…cook could just hav coffee and get 50k…

    • http://www.facebook.com/dany.quirion Dany Quirion

      Little reminder that the 50k is for charity, try to read the whole post next time

      • maverickmax

        my comment is in regard with the above article…Little reminder read the first half of my comment…

  • Kaptivator

    Why spend my money, when I can spend yours? I’m sure that the interest on any bank account, bond, (insert any banking savings instrument here) etc where they are hoarding their billions will cover the interest on that loan and then some. Keep your savings in your pocket and rely on your income to pay back the money borrowed. Just my opinion.

    • http://www.facebook.com/yuvraj.wadhwani Yuvraj Wadhwani

      Sounds smart, doesn’t it?

  • http://twitter.com/JoeTo_97 Joel Torres ツ

    Greed much?

    • http://www.facebook.com/people/Matthew-Childs/1067107105 Matthew Childs

      it’s called smart business. no business starts with the intention of LOSING money…and an absurd tax rate of 35% is LOSING money. don’t tell me if you had the option of paying 12% or 35% that you would willingly and gladly pay 35%.

      • Guest

        Yes, but Apple has more than enough money to pay for the stock. There was no need to borrow money. They could’ve just payed it and been done with it.

      • Miguel Meza

        so if you have 1,000.00 and had the choice to pay $200.00 or $75.00 you would pay $200.00 just because you have enough money?

      • Kaptivator

        Exactly!

  • Om Soni

    Did anyone notice that Cook is holding the iPad mini inverted? :D

    • http://twitter.com/JacobsLiveCA Jacob S

      Don’t worry! It has a gyroscope :)

    • http://www.facebook.com/ClintonWeir Clinton Weir

      The iPad UI rotates to the orientation you’re holding it… so it’s completely usable in the way he is holding it. I actually prefer holding my iPad inverted to get the home button out of the way.

    • http://www.facebook.com/luisreyespr Luis

      I even hear his ipad rotates.

  • jimstead

    Is quoting Enderle meant as an attempt at humor? What does he ever say that turns out to be right?

  • Tom M

    borrow the money from greece lool

  • FrankensteinBlack

    We should add a business surcharge to every corporation hording cash overseas:
    – Why should we have to pay for roads/bridges that their heavily laden tractor trailers destroy?
    – Why should we have to pay for the fire and police force to protect their stores from break ins?
    They got plenty of cash, they should hire their own guards.

    I can keep going but lets not boor everyone. The bottom line? Us hardworking types get left paying the bills. So the next time you look at the taxes taken from your check, remember that you are helping to cover Apple’s tax bills, SUCKERS!

    • http://www.facebook.com/yuvraj.wadhwani Yuvraj Wadhwani

      most ignorant post on this page.

      • FrankensteinBlack

        Wow! Who knew India had Baggers too. See, even an “ignorant” inventor can learn something new every day :^)…

      • http://www.facebook.com/yuvraj.wadhwani Yuvraj Wadhwani

        Well Apple is using a completely legal and widespread method to reduce its tax liability. Its a pretty straightforward thing you see. Interest rates are low in the US so borrowing costs are lower. The interest on savings in banks abroad will be more than enough to pay the interest. Almost all big companies use this tax strategy, Google does this too.

        You must also use your 401k’s and Roth IRA’s to reduce your tax liability right? How is this different then?

        If you are paying too much taxes then you should look at the government, not private corporations. Not all government spending is useful. For growth and increase in GDP, the private sector should use the capital. So, hard working people do not foot the bill if apple saves its taxes. The people would actually benefit more if Apple saved more taxes because a private company is more efficient in capital investment than the government. Now do you get it?

      • FrankensteinBlack

        I tend to be long winded and I am trying hard not to dissect your post (and boor everyone) with 4 full blown paragraphs so I’ll try to keep it small and simple by just picking 1 of 100 things I could use to reply. Here goes: More is spent on our (America’s) military than the next 12 countries COMBINED! Someone is paying for that and it isn’t tax dodgers (many of whom fain patriotism) despite being some of the biggest recipient of such military might. I’ll stop there (for now)…

      • http://www.facebook.com/yuvraj.wadhwani Yuvraj Wadhwani

        I think you are missing the point here. What I was saying that this strategy of minimizing taxes is not limited to Apple. It is completely legal and a lot of companies use this strategy to minimize taxes. So no point in being angry at Apple alone. Be angry at every multi-national corporation there is, like P&G, Coca Cola, Pepsi Co, Google and many more.

        I wrote about the government issue to make a simple point. The US government spends to much money and as a result taxes too much. I don’t know what you made of that.
        BTW, more than 50% of US government bonds are bought by the FED itself.

    • Wiseguy

      What tax bill is Apple shirking that individuals are covering? The money overseas is from business done overseas. Why should U.S. income tax be assessed on business not transacted in the U.S.? If Apple wants to use that money in the U.S., they’ll first have to pay significant tax to repatriate it. For business done in the U.S., Apple does pay U.S. income tax (over $14 Billion last year).

      > Why should we have to pay for roads/bridges that their heavily laden tractor trailers destroy?

      Because we use those roads, too. Besides, fuel tax is intended to fund transportation infrastructure. Fuel tax on diesel, which those big trucks use, is higher than on gasoline. In my state, fuel tax on diesel is about $0.70 per gallon.

      > Why should we have to pay for the fire and police force to protect their stores from break ins?

      Why should we pay for the fire and police departments to protect your home? We do, after all. Heck, I’d be slightly more willing to help cover that cost for a business that provides me a direct service than for you who does not.

      > they should hire their own guards.

      They do. Additionally, the cost of private security is probably included in the cost of leasing retail space in shopping mall locations.

      In both of these examples, you insinuate that Apple is not paying for these things. But it is paying for them, and more — via fuel taxes that its distributors pay, property taxes that it pays, and sales taxes that it generates. And as mentioned above, any insinuation that they pay little or no income tax is also false. They pay a lot.

  • James Katt

    Apple saves money by borrowing. It is a great plan.

  • http://www.facebook.com/michael.noonan.108 Michael Noonan

    And anyone pays attention to Rob Enderle any more? After SO many failed predictions and analysis? Cook’s plan is NOT to eliminate cash reserves, it’s to reduce them. And the debt will be more than covered by cash held overseas.
    And the thought that Cook is setting himself up for a “golden handshake” is so ridiculous it’s laughable. Cook isn’t going anywhere. We’re at the start of the Cook era, not the end.