Barclay’s says Apple should borrow against its overseas assets and the Ben Reitz suggestion generates lots of commentary..
This change would increase the value on assets for shareholders and thus likely raise the price to something more in line with reality.
BARCLAYS: Based on our detailed analysis around borrowing, we believe Apple has the potential to double its level of capital returns if the company makes complete use of its balance sheet. First, we believe Apple could sustainably boost its dividend to more than$14.75, which would put the dividend at a 3.5% yield based on current price. We believe this yield would be attractive considering it would take Apple’s yield above that of Cisco and other bellwethers. Second, we believe Apple has the capacity to increase its buyback program at the same time by $30 billion over three years (up from the existing $10- billion share repurchase program).
The first summary below is via Valueline. Below that are the views of Apple Insider: ” Doing this could allow Apple to boost its dividend to more than $14.75, giving it a 3.75 percent yield that would be comparable to other blue chip companies.”
Time to Borrow?
Barlcyas notes the pressure from shareholders and a significant amount of excess cash on the balance sheet (30% of cash on balance sheet is domestic) is making Apple Inc. (NASDAQ:AAPL) consider a much more significant shareholder return strategy. Currently, Apple has a three-year $45 billion capital return plan in place that has already been depleted by $10 billion.
Barclays believes that Apple should now be strongly considering tapping the debt markets to “borrow against” the significant overseas cash position. This way, Apple could maintain flexibility to make acquisitions and not incur a tax hit for repatriation—all for very low current borrowing costs . As a result, Barclays estimates that Apple could easily double the size of its three-year plan, among the many options it has. However, the analysts still do not expect Apple Inc. (NASDAQ:AAPL) to issue special dividend but expect an updated and thoughtful long-term plan over the next few months.
Even without borrowing, Apple Inc. (NASDAQ:AAPL) should have room to increase its total cash outlay for dividends and buybacks over the next three years. However, borrowing could really change the situation, adding meaningful upside or flexibility to that level. Should Apple tap the debt markets, the company could borrow up to $50 billion technically “against” existing international cash if it wanted to.
Even though this issuance could be very large, the market would likely back such an issuance at a very attractive rate for Apple considering the debt could still be repaid with existing international cash balances after assuming a 35% tax rate for repatriation. Based on precedent set by other maturing companies in the tech space, like IBM, Barclays believes that Apple would be able to borrow at very attractive rates – perhaps below 2%.
Based on their detailed analysis around borrowing, Apple Inc. (NASDAQ:AAPL) probably has the potential to double its level of capital returns if the company makes complete use of its balance sheet.
First, Apple could sustainably boost its dividend to more than $14.75 which would put the dividend at a 3.5% yield based on current price. This raise could be accomplished with only domestic free cash flow at this point – essentially a domestic free cash flow sweep for the next couple of years. This yield would be attractive considering it would take Apple’s yield above that of Cisco and other bellwethers. If Apple could achieve a yield comparable to other blue chip companies, Barclays thinks that Apple could increase to the $575 level.
Second, they believe Apple has the capacity to increase its buyback program at the same time by $30 billion over three years (up from the existing $10 billion share repurchase program). Over the next three years, an increase of this magnitude ($10 billion per year) could add an average $0.65 in added EPS per year.
Barclays is running all their analysis under the assumption that Apple Inc. (NASDAQ:AAPL) would want to maintain at least $10 billion per year in domestic cash through the forecast period – which could be reserved for M&A and general corporate purposes.
In March 2012, Apple Inc. (NASDAQ:AAPL) unveiled a new dividend and share repurchase program. The company started a quarterly dividend of $2.65/share ($10.60 annualized), which was first paid in 4QFY12 and consumes about $10 billion in cash per year. At that time, Apple indicated it would periodically discuss updating the dividend but no time frame was set.
The company first paid a dividend in June 1987 and stopped payments in December 1995. In addition, the Board of Directors authorized a $10 billion share repurchase program that began in Apple’s FY13. The repurchase is expected to be executed over three years primarily to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs. Combined, Apple expects these new programs to utilize about $45 billion of domestic cash in the first three years. Apple had about $43 billion of domestic cash as of its December 2012 quarter-end.
Regardless of how the plan eventually unfolds, something is likely to occur soon, given recent efforts by activists. On February 7, Apple Inc. (NASDAQ:AAPL) released a statement regarding a recent effort byDavid Einhorn to rally support against a proposal to eliminate the company’s capacity to issue “blank check” preferred stock.
In the company’s response to a call for preferred shares, Apple reiterated its current capital return program of $45 billion over three years, noting that $10 billion will have been distributed by the dividend payable date of February 14. Apple noted it would take under consideration the proposal from activist shareholders.
Apple also clarified that the proxy proposal also is meant only to curb management’s ability to issue stock without shareholder approval – the change to Apple’s articles of incorporation would not forbid the company from issuing preferred stock completely. Though the proposal was not passed at the latest shareholder meeting, the analysts expect a similar proposal to re-emerge at the request of key shareholders in the near term.
Barclays believes that a larger cash return program is needed given Apple Inc. (NASDAQ:AAPL)’s share price volatility. Furthermore a new initiative could help smooth the transition from “growth” to “value” investors, which is occurring due to Apple’s slower sales momentum.
Apple Insider had this take on The Reitz
By Neil Hughes
Apple should borrow money at low costs against its significant overseas cash position to avoid a tax hit when repatriating that cash, one analyst believes.
Ben A. Reitzes with Barclays believe it’s time Apple strongly consider “tapping the debt markets,” which would allow it to borrow against the $94 billion in cash the company has overseas, $40.4 billion of which is untaxed.
“This way, Apple could maintain flexibility to make acquisitions and not incur a tax hit for repatriation — all for very low current borrowing costs,” Reitzes said in a note to investors on Tuesday. “As a result, we calculate that Apple could easily double the size of its current three-year capital return plan, among the many options it has.”
If Apple were to borrow, Barclays estimates that the company could double its level of capital returns. Doing so could allow Apple to boost its dividend to more than $14.75, giving it a 3.75 percent yield that would be comparable to other blue chip companies.
Borrowing at low rates against its overseas cash could allow Apple to “maintain flexibility to make acquisitions and not incur a tax hit for repatriation,” Ben A. Reitzes believes.
Reitzes believes AAPL stock could reach the $575 level if its dividend yield were in line with “bellwethers” such as Cisco. He also said the company has the capacity to increase its share buyback program by $30 billion over three years, up from its current $10 billion share repurchase program.
The analysis assumes that Apple would want to maintain at least $10 billion per year in domestic cash. That money could be reserved for mergers and acquisitions, as well as general corporate purposes.
Apple’s growing cash, cash equivalents, and securities, via Asymco.
At the end of last quarter, Apple’s growing cash hoard had reached $137 billion. Particular attention has been given to the company’s $40.4 billion in untaxed overseas cash, with calls from the U.S. for the American company to repatriate that money and pay taxes on it.
Apple had $137 billion in cash as of last quarter, with most of it held overseas and more than $40 billion untaxed.
Last week, The Wall Street Journal did an analysis of 60 large U.S. corporations, and found that they collectively held $166 billion in untaxed offshore earnings as of 2012. Apple’s $40.4 billion represented nearly a quarter of that from just one company.
Market watchers expect that Apple will soon announce what it plans to do with its growing cash and reserves.
It was about a year ago that Apple announced it would begin a quarterly dividend along with a stock buyback plan. With the company’s annual shareholder meeting and a lawsuit from hedge fund manager David Einhorn now behind Apple, analyst Brian White of Topeka Capital Markets said this week he believes the timing would be right for the company to announce its next move.