Apple And The Debt Allure

Apple has made the news big with its recent decision to borrow 40 bn and utilize those funds to pay a dividend.  It has about 137bn cash on hand so why is it borrowing that much money.  The explanation offered is twofold.  First lots of that cash is overseas and under the current tax laws if that money comes back to the US shores then Apple would owe a huge tax obligation.  That is probably true as it is with many other major American companies.  Second the interest rates are at absolutely historical lows and they can borrow the money very cheaply.  Again that is certainly true.  The Fed has pushed down rates to the bottom of the barrel.  Ask old grandma or grandpa about what they are earning on their CD’s these days when they try to keep their money in a very safe place but earn something on it.  They are getting less than one percent.  So there is good logic to what Apple is doing.  People and companies always borrow lots of money when credit is easy and cheap as it is now because of Fed and Federal government policy.   Just take a look at the easy credit policies and the borrowing during the mid 80’s, late ’90’s and the middle of the ’00’s.   The eighties ended up producing the S and L  and bank crisis of that day; the ’90’s saw the ultimate terrible Clinton crash of the NASDAQ in 2000 after the cheerleading for buying the NASDAQ by  both Clinton and Gore; then of course our most recent correction because of the Federal government policy to loan money to anybody with a pulse to buy a home and the CORE act to promote minority ownership.   So Apple and many others at the moment are doing what sure seems prudent at the moment and taking out big loans at really low rates.  They can cite an example of this course of action by simply directing your attention to both the Fed and the Federal Government.  One is printing money like no tomorrow and the other is spending and running up debt like tomorrow will never come.

Having specialized in debtor-creditor relations, bankruptcy, workouts and Chapter 11’s for nigh on 50 years I do have a bit of experience with debt and the problems it can cause.   The first element of debt and the most significant and the one factor that is overlooked by almost everyone is that it is a reality, it won’t go away on its own, it has to be dealt with one way or the other.   This is true for individuals, companies and even governments.   All debt is a restriction and limit on future courses of action.  Provision has to be made for the payment or rolling over of that debt.  Some of future cash flow or earnings must be dedicated to that debt.   In five years when the 40bn comes due Apple will have to either pay it or re-work the payment terms.  In the meantime it will have to spend a certain amount of cash flow for debt service.   Maybe they will make even more money in the next few years, who knows.  But we do know they will have to deal with the debt.  What if when the debt comes due they are working on “The Next Big Thing” and really need 30, 40 or 50 bn for more development or marketing?  What if tax laws have changed and they no longer can even deduct the interest on that bonds they issued?  What if they lose pending litigation and have to pay out some huge judgement reward to a competitor?   The possible needs for money are as endless as the vagaries of the daily business world and markets.    But through it all, the debt remains and must be handled.   Their future options for use of cash on hand has been diminished by the 40bn plus all the interest, even at low rates, and the associated costs like legal and accounting fees.  It is no different than you having to service your mortgage.  A dedicated portion of your future earnings must go to that debt, you can’t use it for anything else.  Debt limits future options.  That is an absolute of economics.   Of course companies that are debt free can go bankrupt.    Hey, lots of buggy whip makers went out of business in the early 20th century.

Credit is needed and it is indeed the lubricant for any modern society.  This is not a cry against all debt, not at all.  But debt is just like fire, it is of great benefit; it gives us light and power but it can also burn the house down if not handled carefully.   I am not predicting any hardship for Apple down the road but I do think this was an inappropriate decision.  This was a voluntary debt; not essential to growing their business but designed to bolster stock prices with dividends from the borrowed money.   I think it is a good company.   But I think they did overlook like some many before them the fact of the restrictions and limits on future actions that debt always brings with it.  They should satisfy their debt as soon as they can.  Debt free companies and individuals always, always have more options available to them than those who must pay debt.  They may have just given some competitor an advantage down the road that they would not otherwise have had.   Some of those competitors are also debt free.  Every heard of Microsoft?  Samsung?

Clorox, the common household bleach, is an amazing product.  It is now over 100 years old and still the best disinfectant for bacteria there is.  It breaks down the cells in bacteria so they can’t adapt to the Clorox and those become immune to its effects.  Clorox is such a simple product.  It is nothing but salt water, regular brine from sea lagoons and such that has had an electric pulse beamed through it.  Changes it properties just enough to make it a household must have.

“Neither a borrower or lender be”  both Proverbs and Ben Franklin.

1 Comment

Filed under business, Economics, government, Politics

One response to “Apple And The Debt Allure

  1. Anonymous

    Great post. I presume Apple’s financial team knows what they are doing. I guess there are risks and rewards with every course of action. Thanks for the breakdown on those risks and rewards.

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