Apple's buyback and bond issue
This is all about taxes, so bear with me.
Let's, for the sake of argument, say that AAPL has $50 billion overseas - out of the USA, where they are based - and that they desire to return this money to shareholders for shareholder benefit. This is, by the way, true as far as I can determine in terms of what was said by Tim Cook, CEO, on the last earnings conference call.
They could do it this way:
1) Repatriate $50b of cash. Incur an immediate 35% tax on that money, so that they really only have $32.5 billion to use.
2) Pay 32.5 billion to shareholders in the form of a $36/share special dividend. Most dividend holders immediately incur a 20% tax on that. Total cash returned to shareholders net of taxes is $26 billion. Not very good for a $50 billion expenditure.
3) Results: nearly 50% of the money lost to taxes. No tax benefit accrues to AAPL or anyone else. Going forward, AAPL's share count remains unchanged and their future dividend payouts and P/E are
unaffected by the transaction.
Or they could do it this way:
1) Repatriate NO cash.
2) Borrow $50 billion in the bond markets in the US between now and 1Q16. Let's say that today's rate, 2.415%, is approximately what they have to pay on this.
3) Use the money to buy back shares. AAPL's trading around 438 right now; let's say they can get the shares they want at $450. (At $450, AAPL's annual dividend yield is about 2.5%).
4) Results: No repatriation tax hit to AAPL. No dividend tax hit to AAPL shareholders. Shareholders who choose to sell get the price they wanted for their shares.
5) Approximately 12% of shares out are retired by this maneuver. This immediately boosts future P/E figures by 12%.
6) The retired shares no longer incur a dividend expense. Annual yield was 2.5%, and AAPL is paying 2.4% for the privilege of having the money they are using to buy back shares, so AAPL immediately benefits cash-flow-wise because their cost of new capital to retire shares is less than they would have paid in dividends.
7) Unlike dividend expense, interest expense is tax-deductible. On $50 billion at 2.4%, the interest is $1.2 billion annually. Assuming a 33% marginal income tax rate, Apple suddenly profits by lessened tax expense of $400 million a year on this transaction - sure, not much compared to gross revenue, but heck, any time a company I own has a chance to get $400 million free, I would advise them to take it.
One of the strongest bear cases for AAPL was this: who commands enough capital to 'move the needle' on AAPL's market cap and share price? Well, AAPL themselves do. Warren Buffett knew this and publically advised Tim Cook to undertake this maneuver a few months ago. It is a no-brainer; it is a win for everyone except the U.S. Treasury.
Even L0RDZ has to admit that. :)