What does the Apple bond launch mean?

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Last week in Australia saw an extraordinary event – or at least it should be an extraordinary event.  Unfortunately in today’s market, it is almost normal.

Technology giant Apple launched a bond in Australian dollars.

They wouldn’t actually need the money at all if it weren’t for the US tax system.  Apple is based in the United States, but is making some very large profits all over the world.  However the company struggles to move profits made outside the US back to the USA because they will have to then pay tax at a higher rate on the funds.  Unfortunately they do want some money to make its way back to America to fund dividends and share buybacks.  This is particularly the case more recently as some activist shareholders have demanded higher payouts and stock repurchases to increase shareholder returns.

So what do you do if you have over $100 billion in cash lying around the world but can’t use most of it to pay your shareholders?  Well if you’re Apple, with a AA+ credit rating (better than the Australian banks and only one notch lower than the Australian Government), you borrow it at very low rates and use the debt to pay dividends and buy back shares.  The funds are not borrowed from a bank in the way a smaller business might do it, but are instead borrowed by Apple issuing Bonds to institutional investors.  Much of the borrowing has taken place in the US, and in US dollars, but last week the company undertook its first issue in Australian dollars.

All this was apparently very exciting news for Australian investors in such things.  But when we saw the details, we were much less excited.

Apple issued two types of bonds – one with a 4 year maturity (repayment date) and one with a 7 year maturity.

Now for the returns.  For the pleasure of holding some Apple bonds for a period of 4 years, you could be virtually guaranteed to achieve a return of 2.88% per annum.  This may well turn out to be less than inflation, and certainly less than you could currently get in a term deposit or a good online savings account with an Australian Bank.  The alternative was a 7 year bond with a much higher yield – 3.71%.  Now, while it would be lovely to be able to say that you hold an investment in one of the world’s largest companies and while the debt is considered extremely safe by the ratings agencies, most investors would hardly say that these are acceptable returns for tying up your money for the long term.

So how much money did they raise – a million?  10 million?  100 million?  Well that’s the extraordinary thing – both types of Bond were well oversubscribed, with over $1 billion invested in each one according to the Australian Financial Review.  Who’s buying?  Some of Australia’s largest bond fund managers no doubt, along with a good smattering of insurance companies and the like.  If you have your super invested in a retail or industry fund with an allocation to fixed interest – you may be lucky enough to have just bought some yourself (indirectly via the underlying fund manager of course).

For us, these sorts of deals are a no-brainer.  We just say no.  Because they simply don’t deliver an acceptable return if they are held to maturity.  The only way this might occur is if you buy now and hold out for an investor who is prepared to accept an even lower return in the future to buy it from you in the secondary market.  Of course, this could well happen, but it’s not a sound basis on which to make the investment in our view.

At Affluence, we prefer slightly more risk, and substantially better returns.  Otherwise, you might as well leave your money in the bank.

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