Apple’s stock price has dropped nearly 30-percent the past year which has some Monday morning quarterbacks calling for the head of CEO Tim Cook on a platter. That’s a patently ridiculous notion, of course, because Apple’s financial fundamentals are strong. So strong that any one of Apple’s competitors would be happy to trade their numbers for Cook’s books.
Why does J.P. Morgan analyst Mark Moskowitz in Barron’s think Apple needs to borrow money?
In our view, we think that Apple could be on the brink of driving a major leveraging up. With the company’s cash pile growing and historically low borrowing rates, we think that investors should start to consider what the expanded cash uses could be if Apple takes on $15 billion, if not $20-25 billion, in unsecured debt in the near to mid term. Given the company’s strong operating profit and cash flow metrics, we would expect Apple’s borrowing rate to be 2.5% to 3.0%, which is much better than paying 25-30% tax on cash repatriation.
That’s a lot of financial gobbledegook for ‘it’s cheaper to borrow money than to pay taxes‘ while trying to repatriate profits.
Recall, 69% of Apple’s cash is held overseas. Overall, we think that a more shareholder-friendly capital allocation program could recast Apple to a wider range of investors… We estimate that the dividend yield in the “New Apple” scenario could increase to 4.0% versus 2.6% currently, and the stock repurchase activity could nearly double from current levels.
The hidden incentive behind the verbiage is ‘stock repurchase’ and hidden behind that is ‘more dividends’ for shareholders.
In other words, Apple has so much money sitting around that shareholders are clamoring to have Apple return some of it, but they recognize the debt penalty that could be incurred, so anticipate that Apple could borrow money to finance operations, and then ‘return money to the shareholders with a smaller penalty.’
There’s an assumption there that Apple must bring home those foreign profits to re-invest, buy stock, return shareholder money, and so on.
How about this? Apple should just sit on it. ‘Return money to the shareholders?‘ Seriously?
It’s not shareholder money. It’s Apple’s money. Shareholders did not give money to Apple. They bought stock in the hopes the stock price would go up. Instead, the past year it’s gone down, hence the growing unrest for Apple to repay shareholders with the company’s profits, even if the company needs to borrow money to do it.
These shareholders are not interested in Apple’s long term well being. They’re interested in a quick return on their investment, and when a stock dives, especially for non-financial reasons, the investment becomes more long term and needs a recovery to eventually reach a gain, and the market just can’t handle the need to be patient.
Maybe Apple should let the stock drop even more and then take the public company private.