Even though the international credit rating agency Fitch does not have a formal credit rating on Apple (NASDAQ:AAPL), the iPhone maker’s decision to borrow money to fund its share buyback program and increase of its quarterly dividend prompted the firm make a few comments about its credit worthiness.
In a report published Monday, Fitch analysts — led by James Rizzo — wrote that if the ratings firm were to release a public grade for Apple, “inherent business risk that overshadows a significant liquidity cushion” means that such ranking would likely fall “at the highest end” of the single-A category. This tier is at least three levels lower than the Aa1 rating held by Moody’s and the equivalent AA+ grade assigned by Standard & Poor’s.
While Apple held $145 billion in cash as of March 30 — a figure greater than the combined funds of every other triple-A rated U.S. company, according to data compiled by Bloomberg — that balance sheet strength is now overshadowed by risk from increasing competition, rapid technology changes, and fluctuating consumer tastes, noted Fitch.
“Consumer product companies such as Sony (NYSE:SNE), Nokia (NYSE:NOK), and Motorola Mobility have proven the risks related to ever-changing consumer tastes, low switching costs, and a highly competitive environment,” wrote the analysts. “Each has historically had a dominant market position and strong financial metrics, only to falter over a relatively short period of time.”
Yet, Apple’s “better diversification and the stickiness of its iTunes ecosystem” would ensure that its credit rating would likely be at the highest end of the single-A tier.
Concerns that changing consumer preferences and tougher competition have lowered Apple’s pace of sales growth were reinforced last week when the company forecast revenue for this quarter that indicated the company could miss analysts’ expectations by as much as $4.9 billion. Not only did Apple disappoint with its revenue forecast, but for the first time in a decade, Apple’s quarterly profit declined as increased competition from Samsung (SSNLF.PK) and Google’s (NASDAQ:GOOG) Android began to take a toll in the second fiscal quarter.
Comparatively, Fitch holds slightly better ratings on many other firms in the technology sector, including an AA+ for Microsoft (NASDAQ:MSFT), an A+ for IBM (NYSE:IBM), and an A+ for Oracle (NASDAQ:ORCL).
Both Goldman Sachs (NYSE:GS) and Deutsche Bank (NYSE:DB) will help Apple sell bonds to finance its dividend increase — which will return an additional $55 billion in cash over the next three years to compensate shareholders for the massive losses the stock has etched out on the stock chart since reaching an all-time high last September. The company’s Chief Executive Officer Tim Cook hired Goldman Sachs after last year’s shareholder meeting to provide advice for improving transparency and governance, including guidance on what to do with the its growing cash stockpile. This move posed quite a contrast to the leadership of Steve Jobs, who famously eschewed the help of large Wall Street firms.
Apple chose to use debt to finance the deal because by borrowing money the company can avoid taxes that it would incur repatriating the funds.
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