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COLUMN: To cash-rich companies, borrowing makes sense

Apple, a cash-gushing company that now has about $150 billion sitting in the bank, has decided it needs to borrow some money.

Apple announced this past week that it plans to issue bonds to help fund its commitment to higher dividend payments and stock buybacks.

On the face of it the announcement doesn’t make a lot of sense. Apple has plenty of cash on hand to return more money to shareholders, and additional cash keeps pouring in despite a slowing growth curve.

But many other cash-rich U.S. companies have made the same decision, due in large part to two factors.

The first is an extremely low interest rate environment in which conservative investors will accept pitifully low bond yields for high-quality debt issues.

For example, this past week Nike sold A-plus-rated 10-year bonds at 2.2 percent and 30-year bonds at 3.6 percent, The Wall Street Journal reported.

Standard & Poor’s has rated Apple’s debt at AA-plus, so the interest rate on its debt is likely to be even lower than the bonds Nike sold. (As a side note, Apple’s stock now carries about a 3 percent dividend yield and a historically low price-earnings ratio. To me, buying Apple’s stock would therefore make a lot more sense than buying its bonds.)

Apple’s decision to issue debt is probably tied more to the second factor: the fact that about two-thirds of its cash hoard is tied up overseas from selling its various iDevices outside the U.S.

Companies that return (“repatriate”) overseas earnings to the U.S. must pay Uncle Sam’s corporate rate on the cash. That means paying as much as 35 percent of the repatriated cash to the federal government.

That means Apple, which has about $100 billion parked overseas, would potentially have to pay the government as much as $35 billion to bring the cash home and use it to buy back shares and pay dividends.

Apple isn’t alone in not wanting to do that. U.S. non-financial companies reportedly have almost $1 trillion in cash overseas. Many have called for a tax holiday that would allow the companies to put that cash to work in the U.S. without having to pay the government anything.

That would seem to make a lot of sense. Companies aren’t going to bring the cash back anyway as long as the repatriation tax is in effect, so the government isn’t going to increase its revenues regardless. But allowing the cash to come back tax-free for a short period would likely create jobs as the companies used it to fund new plants, research and development and more.

Barring that change, cash-gushers like Apple will continue to borrow money that they wouldn’t otherwise need.

Staff reporter Bill Freehling writes this biweekly column on business, personal finance and investing. He can be reached at 540/374-5405 or


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