Bernstein Research analyst Toni Sacconaghi this morning addressed one of the Street's favorite topics this morning: Apple's capital allocation strategy. With around $100 billion in cash on the books, CEO Tim Cook recently has acknowledged that the company has more in the bank than it needs for the normal course of business. He has said on several recent occasions that the Apple board is studying what to do with the money.
Sacconaghi has a counter-intuitive idea, which is that Apple might want to consider bolstering its potential payout by tapping the credit markets for $50 billion or even $100 billion.
Sacconaghi noted that only about a third of Apple's cash - around $34 billion is held in the U.S. To pay any of that out to holders would require repatriation of the cash, which would then be subject to federal income taxes; that is not likely to happen barring a change in the tax code. He figures Apple would have to hand 30% of whatever it brought home right to the taxman.
Still, if Apple chose to payout 100% of its onshore cash generation as a dividend, without actually touching that cash, the company could offer a 2.5% dividend yield, the Bernstein analyst calculates. The analyst noted that at that level, the company would have a payout rato of 30% of cash, still below average of around 36% for the largest companies in the S&P 500. And Apple would still be growing cash by more than $30 billion a year, resulting in offshore balances of over $200 billion five years from now.
Sacconaghi proposes a potential solution. The company could raise $50 billion or even $100 billion in debt. He notes that they could certainly offer debt at a very low rate. IBM, he points out, recently sold $1.5 billion of 3 year notes t 0.55%, and $1 billion of five-year notes at 1.25%.
Were the company to sell $50 billion in debt, he says, it would allow Apple to support a 40% payout ratio for nearly 20 years, "giving it considerable time to wait for a change in the tax law that would enable more favorable access to offshore cash or cash generated offshore." He adds that accessing inexpensive financing at historically low rates "makes eminent sense for financial flexibility, particularly since Apple holds no debt today."
He adds that if Apple issues $50 billion to $100 billion in debt, its debt/market cap ratio would only be 10%-20%, in line with other AA or higher rated companies, and net cash would remain positive, versus an average of -2% net cash to market for other AA-rated companies. He also notes that the interest would reduce earnings by less than 1.5%.
While Sacconaghi admits that $50 million sounds like a lot of debt, companies like AT&T, Verizon and Wa-Mart all have over $50 billion in debt - and Apple has a market cap more than twice any of those companies.
The analyst concedes that a $50 billion debt deal would be the largest on record; over the last 10 years the largest debt offering was a $33 billion raise by Roche, which was funding its acquisition of Genentech in 2009. But Apple keeps going places that no one ever imagined - so why not the debt market?
AAPL is up $10.87, or 2% to $562.87.
