In 2000, Apple Inc. reported a meager $786 million in net profit for the entire fiscal year. Fast-forward to January 2015 and Apple reported a remarkable $18bn (£11.8bn) in net profit in a single fiscal quarter, making it the largest quarterly net profit ever made by a publicly listed company. After beating even the most bullish forecasts, Tim Cook, CEO of Apple, said
“He was confident that the company would continue to grow at a rapid pace”
Indeed, he was correct as on Tuesday (10th February 2015), shares in Apple rose 1.9% to $122.02 at the close of trading giving Apple a market capitalisation of $710.7bn – making Apple the first U.S. company in history to reach the $700bn milestone. On Thursday (12th February 2015), the share price rose again by 1.27% to $126.46 making Apple worth $728.35bn. Incredibly, the most valuable publicly listed company in the world is continuing to grow at a rate more analogous to start-ups while increasing its sizeable cash reserves in the process.
Escalating Cash Reserves
Apple’s cash reserves on its balance sheet now stands at around $178bn – consisting of cash, cash equivalents and marketable securities.
“Apple is perhaps the most overcapitalised company in corporate history”
However, the vast majority of this money – around $156bn – is generated from profits that have been booked in overseas countries and held by foreign subsidiaries of Apple. While such an aggressive Irish tax structure has allowed Apple to keep profits out of the reach of the Internal Revenue Service, they are unable to neither reinvest in their US businesses nor provide value to their shareholders without bringing upon themselves a substantial corporate tax bill of 35%. While their overseas cash reserves are held in Ireland, they are managed much closer to home by Braeburn Capital in Reno, Nevada – a state with no corporate tax or capital gains tax. Braeburn Capital, a mysterious investment subsidiary mentioned merely once in Apple’s annual report is quite simply:
“The largest hedge fund you’ve never heard of”
According to Tim Cook, 89% of Apple’s cash reserves will remain overseas until there is a “dramatic simplification of the corporate tax code” including a “reasonable tax on foreign earnings that allows the free flow of capital back to the United States.” In essence, Apple is at ease in seeing yearly growth in their overseas cash reserves while using debt financing (bond offerings) to fund share repurchases and dividend payments in the meantime.
Swiss-franc bond offering
Apple announced on the 10th February 2015 that it is expected to complete a two-part sale of Swiss-franc bonds, raising over $1bn in the process. Overseen by Goldman Sachs and Credit Suisse, the 10 year bond will have an implied yield of around 0.25 percent while the 15-year bold will have an implied yield pegged at 0.7 percent.
This may be the first time Apple has borrowed in the small but stalwart Swiss bond market but it is not their first bond offering of the year as they raised $6.5 billion as recent as last week. Furthermore, in April 2013, Apple raised $17 billion in the largest corporate bond offering in history to fund their on going share repurchase scheme.
So, why borrow?
Apple is clearly taking advantage of low borrowing costs in Europe where inflation is standing at -0.6% and interest rates have been dropped in view of this to deter deflation and stimulate growth. In the past, only two companies – Novartis, a health-care company and Swissgrid AG, a utility company – have issued Swiss-franc bonds with similar maturities at lower yields than Apple.
Increased demand for government debt in Switzerland following the removal of the franc’s euro peg by the Swiss National Bank has forced the yields on Swiss government debt to levels below 0% on bonds with maturities up to 10 years. As corporate bonds are naturally linked to government debt, these negative yields allow Apple to borrow at rock bottom rates. As the funds from bond offerings are not deemed profit from sales out with the U.S., they are not subject to U.S. corporate tax. Thus, it is more beneficial for Apple to make the most of low borrowing costs and steer clear of tapping into their far-flung cash reserves.
What lies ahead?
Apple is not the first U.S. Company to hold large amounts of cash reserves on their balance sheet and will certainly not be the last. Furthermore, in recent times there has been a sharp increase in the quantity of cash reserves held overseas for tax purposes. The problem facing Apple now is generating a bigger return to their shareholders than the paltry interest rates earned on their cash reserves. While other technology companies have been carrying out large-scale acquisitions – the acquisition of Motorola by Lenovo ($2.91bn), SmartThings by Samsung ($200 million) and WhatsApp by Facebook ($19bn) – for some time now, Apple’s largest ever acquisition was its most recent – Beats for $3bn. So, as a result of their new found appetite for large-scale acquisitions, undergoing more acquisitions out with the U.S. may be the most efficient use of their overseas cash war chest.
Since the beginning of the 2014 fiscal year, even though Apple has spent $45bn returning money to its shareholders through its impressive share repurchase scheme, it is still simply making more money than it can spend. If, as expected, the release of the highly anticipated Apple iWatch in April is an instant hit, it is not unfathomable to suppose Apple can break their own records and witness their market capitalisation surpassing the $800bn mark in the future.