Has Apple Started a Tech Company Bond Trend?
Apple (NASDAQ:AAPL) already has an established reputation as a trend-setting company that regularly produces revolutionary new products that often set the gold standard in various niche tech markets. Was the unprecedented $17 billion bond offering another trend-setting move from the Cupertino-based company?
Apple took the first step last week in funding its $100 billion shareholder capital return plan with a $17 billion bond sale bonanza. Now several other large tech companies, including Nuance Communications (NASDAQ:NUAN) and IBM (NYSE:IBM) are following suit.
Like Apple, many other large tech companies are developing substantial cash reserves. With sluggish demand and uncertain growth prospects, some of these tech companies are beginning to take a look at stock repurchase programs as a sensible way to increase value for the shareholder.
Taking on debt to fund stock repurchases is attractive for several reasons. With interest rates held at historical lows by the Federal Reserve, companies now have an opportunity to borrow money at little initial cost. This strategy has the added bonus of avoiding paying taxes on overseas cash reserves. At 35 percent, the U.S. currently has the highest corporate tax rate in the G7 group of countries.
When a company buys back its own stock, it drives up the price, providing a greater value for the shareholder. These stock repurchases can also often be coupled with a dividend hike which further rewards the shareholder. This provides a greater equity return for a company than simply letting its cash hoard sit overseas earning a low 1 or 2 percent.
Finally, a stock repurchase strategy offers a much lower risk than an acquisition strategy. As analyst Bret Jansen points out at Seeking Alpha, many historical tech company acquisitions have actually lowered stock value. Jansen believes that EMC Corporation
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