July 29, 2016 — 1:13 PM EDT
Debt investors’ irrepressible appetite for Apple Inc. turned the company into the biggest corporate-bond issuer in the world as it raised more than $80 billion in just four years. Now, some analysts are asking whether that’s too much, too fast.
On Thursday, Apple sold $7 billion of bonds, its seventh multi-billion dollar offering since 2013 and third this year. Investors flocked to the sale, allowing the iPhone maker to reduce yields it initially offered to pay on the securities. Bond buyers shrugged off concerns that the company might be borrowing too zealously to back share repurchases rather than financing the move by repatriating the $215 billion of cash it holds overseas.
Starting from almost nothing in 2012, Apple’s borrowings have risen nine times faster than its cash, according to data compiled by Bloomberg. The debt has allowed the company to buy back $116 billion in shares over a five-year period through March 2016. Investors have gladly funded the buybacks, with demand so overwhelming that the company has been able to lower its borrowing costs each year.
“You kind of take a look and do a sanity check,” said Gerald Granovsky, an analyst at Moody’s Investors Service. It doesn’t make sense for Apple to have that much debt “no matter where the cash balance is.”
Josh Rosenstock, a spokesman for Apple, declined to comment.
Through the first quarter of 2016, Apple bought back more than twice as much stock as any other S&P 500 company, according to data from S&P Dow Jones Indexes. “I don’t think anyone is near Apple’s stratosphere on what they buy back on an annual basis,” said Granovsky, who assigned the bonds an Aa1 rating, the second-highest rank.
Apple, which generates almost two-thirds of its revenue from iPhones, has been relying on share buybacks to help boost its stock price as the global market for smartphones cools. Growth in the smartphone industry will slow to 3.1 percent this year, down from 11 percent last year and 28 percent in 2014, according to researcher IDC. Apple shares have dropped more than 15 percent from their peak a year ago.
Apple this week said a slump in iPhone sales eased in the three months ended June 25, helped by demand for its new SE model, a low-end device aimed at consumers in China and other emerging regions. Still, iPhone unit sales were down 15 percent from a year earlier.
“Apple is just a fairly risky company from a business perspective,” said Jordan Chalfin, an analyst at debt research firm CreditSights, who has the equivalent of a sell rating on Apple bonds. “If they miss a trend or somebody comes out with something better, it makes it very difficult for them to maintain market share.”
In a note analyzing Apple’s bond offering, Chalfin advised clients to hold on to their cash for Microsoft Corp., which he described as “a much safer credit than Apple.” Microsoft and Oracle Corp., have also sold debt this year to fund shareholder rewards.
Still, Apple’s frequent issuance remains a draw for investors. John Majoros, a money manager at Wasmer, Schroeder & Co., which manages $6.2 billion, including Apple bonds, said the regularity of the deals meant the bonds were more attractive than other AA rated notes.
“We believe they have a lot of value,” Majoros said. “They trade cheap to their rating, there’s no question about it.”
The longest portion of Apple’s $7 billion sale on Thursday was $2 billion of 3.85 percent 30-year bonds that yield 1.63 percentage points above comparable government debt, according to data compiled by Bloomberg. That compares with an average spread of 1.13 percentage points on bonds of similar ratings and maturities, according to Bank of America Merrill Lynch index data.
S&P Global Ratings isn’t concerned about Apple’s growing debt pile. The ratings firm maintained its equivalent AA+ credit grade on Apple’s long-term debt and gave the new bonds the same ranking in a note reviewing the bond sale on Thursday. S&P described Apple’s financial risk as “minimal” and labeled its financial policy “conservative.”
“Although we expect total shareholder returns to exceed free operating cash flow on occasion, robust overall cash generation affords the company the flexibility to return large amounts of cash to shareholders without detracting from the overall credit quality,” S&P analysts led by Andrew Chang wrote.
Moody’s Granovsky says that Apple’s credit quality may not always be as strong. Slowing iPhone sales, a challenging market for refinancing or investor wariness toward technology company bonds “may not be congruent with an Aa1 stable rating,” in future, he said. “We have to recognize that if there’s such a concept of ‘weakly positioned’ at that rating level, it’s probably it.”