Bond math 101 & Is what is good for Apple good for you?

Beware bond offerings from companies who don’t need the money.  Apple had $29 billion in Cash & Short Term Investments on September 28, 2012.  If they are issuing debt for cash they don’t need, there is really just one reason; it is extremely advantageous for THEM to do so.  If it’s great for ‘them’, it is likely bad for you, the individual investor.  Let’s take a look at the recent bond offering from Apple and see how it has performed.

On May 2nd, 2013 Apple successfully priced a $17 billion, six-part offering including the 10 and 30 year bonds shown below as bonds 5 and 6 in the deal.  Initial investors have seen the price of their Apple bonds simply get crushed as interest rates rise, sustaining declines in market value of 8% on the shorter maturity and nearly 13 points on the longer issue.  In less than two months, nearly three years of interest income has been lost in principal value.  Apple, who attracted so much debt capital at near record low yields is the clear winner.  Investors are the clear loser as interest rates have risen.  Not coincidentally, the pricing of the Apple deal occurred on the same day as the recent low in interest rates was recorded on May 2nd.

5.) $5.5 billion of 2.40% coupon, May 3, 2023 maturing notes, CUSIP 037833AK6

6.) $3 billion of 3.85% coupon, May 4, 2043 maturing notes, CUSIP 037833AL4

Moody’s and S&P both assigned the second highest credit rating possible to Apple (Aa1/AA+ respectively).  While that may address the credit risk, the rating agencies do little to warn investors on interest rate aka price risk.

Speaking of credit, in the Prospectus Supplement, Apple states that it intends to use the net proceeds from the bond offering “for general corporate purposes, including repurchases of our common stock and payment of dividends under our recently expanded program to return capital to shareholders.” I am sure there are strong opinions among investors about whether Apple should be borrowing money to fund stock repurchases and dividends rather than invest further in its business to enhance earnings which can pay back this large debt offering in the future.  The efforts to boost the price of Apple shares has been a failure as since May 2nd, Apple shares have fallen from $445 to $396 as I type this (down from a high of $702).  Apple is also exposed to technological obsolescence.  While fans can’t conceive of a day where Apple won’t be number one, consider that once Sony, Nokia and Blackberry were once industry leaders in their fields.  Apple’s future will largely depend on constant successful innovation, absent Steve Jobs, in a highly competitive and ever-changing world.

I would avoid Apple bonds as an investment as higher interest rates will likely result in lower prices in the future.  I recommend you view my related blog: Hey, Where are you going with that punch bowl? (https://christinemederaccountingadvisory.wordpress.com/2013/06/19/hey-where-aer-you-going-with-that-punch-bowl/).  If you’d like additional clarity into your specific equity holdings and the market in general, please contact me at Christine Meder’s Accounting Advisory Services mederchristine1526@gmail.com to schedule a free 30 minute consultation or tweet me at @christinemeder1.  #unrbrand

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

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