Here’s Why Buffett Won’t Buy Apple Bonds

Repatriation taxes being what they are, Apple (NASDAQ:AAPL) decided to capitalize on record-low interest rates and tap the debt markets in order to finance a record-setting stock repurchase program. On April 30, the company announced a $17 billion debt offering in conjunction with its capital return program to shareholders, spanning 3, 5, 10, and 30-year maturities.

Offering Rate Maturity
$1,000,000,000 Floating Rate 2016
$2,000,000,000 Floating Rate 2018
$1,500,000,000 0.45% 2016
$4,000,000,000 1.00% 2018
$5,500,000,000 2.40% 2023
$3,000,000,000 3.85% 2043

These rates may look somewhat attractive in the current market, but investors used to an average yield of 5.87 percent over the past decade seem to think otherwise. At 3.85 percent, Apple’s 30-year debt is the only offering to outgun its dividend yield.

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Because of this environment — one where the average payout rate on dollar-denominated debt has fallen to 3.35 percent — investors like Warren Buffett, the man behind Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB), are staying away from corporate debt. His company has reduced its holdings of corporate bonds by 14 percent over the past two years, while it grew its equity portfolio by 54 percent over the same period.

“We’re not buying bonds of Apple — we’re not buying bonds of anybody,” Buffett said, according to Bloomberg. “It has nothing to do with them being a tech company. The yields are too low.”

Why is Apple issuing debt?

At the end of April, Apple extended its hand to shareholders who stayed long during long, bumpy descent to $385.10 per share. Ahead of its second-quarter earnings release, bears grumbled with enthusiasm about shrinking margins, the inevitable year-over-year earnings contraction, and the vagaries of a rapidly-evolving technology market that, for the first time in years, could be getting ahead of the company.

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Taking these criticisms in stride, Apple’s board decided to put a floor beneath the stock by announcing a tremendous capital return program. The company increased the size of its share repurchase program from $10 billion to $60 billion and hiked its dividend by 15 percent. The board declared a quarterly dividend of $3.05, increasing the company’s annual payout to an insane $11.46 billion, nearly 30 percent of 2012 net income.

All told, the revamped capital return program will cost the company something in the order of $100 billion over the next few years. The company would have no problem financing this operation out of pocket — $145 billion in cash and investments at the end of the last quarter — but a huge amount of its war chest is held overseas. Analysts estimate that the company has about $45 billion in the U.S., a product of the fact that the company has historically pulled in more than 60 percent of its revenues from foreign markets.

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