Blain’s Morning Porridge Feb 2 2020: Apple Bonds hide a secret..
“Adam ate the Apple, and our teeth still ache.”
Yesterday Apple launched a new $14 bln multi-tranche bond deal, raising new debt up to 40 years. It was a classic deal. Although the firm has $196 bln in cash, the world’s most valuable company says it doesn’t really want to be sitting on a large cash position, and many suspect it would much rather give it back to stock holders. Why not? When rates are this low, what’s not to like about leveraging up and monetising equity into debt!
The new Apple bonds pay a 96 basis point premium over US Treasuries for the 40 year bond deal. That may be even be a bargain! If Apple was a sovereign nation, you would not be worried – it has around $126 bln debt out-standing, which is peanuts when its last quarter generated $110 bln revenues and $28 bln profit. The Reinhart & Rogoff rules says 70% debt to GDP is where you should start to worry about a nation’s debt. The US, with around $27 trillion in debt is around 136%. Ouch. Apple or Treasuries?
But having a lot of cash not doing very much isn’t a good thing. Although Apple has demonstrated it is an astute investor in financial markets, it’s has always been under pressure to do something with its cash pile or hand it back to investors.
What could it do? I read rumours of its hooking up with Korean car makers to launch its own Electric Vehicle (although the rumours also say the Koreans don’t want to give up their own chance to simply become white-label production for iCars.) Another item was about Apple’s coming take on Smart Glasses, or its new headphones at $600. Or it might go acquire something new, disruptive and innovative in the services sector – the area its’ targeted for growth.
While Apple is not in any imminent danger, it really has to do something. For those of us of a certain age it remains stylish, fashionable and a design icon. I’ve said it before – I am an Apple Addict. But just like me it’s becoming a bit sedentary. Just like me its’ getting older, more mature, and is hardly the disruptive force that pioneered and popularised personal computers, won the laptop battle, revolutionalised digital music via the iPod, created the smartphone (well got the credit) in the iPhone, the iPad.. and er… what else?
Not so much recently.
Analysts are noticing revenues on its core computing and mobile products are excellent, strong but essentially static. Someday.. someone else might disrupt its niche with a better smart-system everyone wants. If its earnings are ultimately capped, it can’t expect its equity to continue its stratospheric trajectory, and repaying debt before it becomes a zombie becomes the issue credit analysts will look at.
To kickstart new revenues, the firm is now focused on services, but iCloud is just another cloud service (I use Dropbox. Easier.) Or maybe its Streaming – maybe, Spotify is the clear music leader, while Apple TV is lacking in the steady stream of binge-watch series that Netflix deluges us in. (Full marks for Ted Lasso, but everything else is aimed at the other side of the pond.) I am sure Apple will be very good and competent in services, but it’s unlikely to dominate in the same way it has in mobiles the last 10-years.
As it continues to mature, its multiples will change. History shows no firm remains top for ever. Something else will replace it. 20 years in the top ten is a very good result. At some stage Apple will enter old-age. All firms get old eventually.
But for the meantime, Apple’s debt binge is likely to mean further upside for stock holders. For years it has been under pressure to use its healthy cash balance. Use it or lose it. Unless it has plans to make major acquisitions, then it would prefer to give it back to stock holders – which means the debt issue from y’day is great if you hold equity in Apple (as I do).
I’m seldom a fan of stock buybacks – it usually shows a lack of imagination by company management, but when rates are this low and a company can tap the market multiple times, then why not? (Y’day was the third time Apple has tapped the debt markets in 12 months.) All that cash will likely be used to push up the stock price via buybacks.
However, what happens in 40 years time when it comes to repay the debt? That will be interesting? Nations last longer than companies. US treasuries or principal back on Apple Bonds as the company resides in a care home? Just asking..
Let’s go back to Ireland and why it matters to the UK and Scotland
Back in the EU, President VDL threw Kommissar Dombrovskis under the bus y’day over her humiliating retreat on exporting vaccines into the UK. Almost closing the shared Irish border without telling either the Republic to the South or the Norn Iron Taliban to the North was a demonstration of powers Brussels would like, but don’t yet have.
As Bloomberg put it: “Irish Foreign Minister Simon Coveney said he retains confidence in Von der Leyen.“To her credit, she acted to fix the mistake as quickly as she could,” he said.” On the other hand…. she did approve the EU unilaterally closing borders between two sovereign states – with zero consultation.
Yesterday a number of Irish chums got quite shirty at my accusation they were puppet collaborators with EU occupation forces. I replied that I was surprised that none of the Irish papers seemed to be making anything over the way in which Brussels stomped all over Irish sovereignty. Anything to keep the peace, and EU grants flowing, I joked.
One very good Irish chum made the comment on how good the EU has been for Ireland. He pointed out Irish per capita GDP has risen to €79k, while Norn Iron (the UK bit in the North) is a mere €29k. Irrefutable evidence Yoorp works.. but it’s not. It suggests the Irish are very canny. They have played Yoorp very effectively with one hand, while on the other, it’s no secret that being English-speaking with an “enlightened” attitude to the tax affairs of US big tech has benefited Ireland enormously.
This is where the Scots might want to pay attention. Per capital GDP in London is €57k. As Norn Iron was part of Yoorp till 33 days ago, it hints something else explains why it so lags the South. Per Capita GDP in Scotland was €38k. I suspect both Norn Iron and Scotland GDP data demonstrate the issue that explains the core of nationalist politics – being a long way from London means they simply don’t get the attention London does. The success of Ireland (especially since the 1970s) is due to self-confidence as a vibrant state has been created around a vibrant capital in Dublin.
In contrast, the Troubles in Northern Ireland held back investment. In Scotland, it’s the perception of how far away London is, and how little it cares that has driven the SNP’s success. It’s no secret Margaret Thatcher despised the socialist leaning Scots – the consequence of which, and her lasting legacy, will likely be the break-up of the union. Modern Tories are trying to demonstrate love for Scotland, but it’s pretty ham-fisted. Boris’ intentions may be good, but up North he is despised by folk with long memories..
Back in Ireland, I have wondered whether it remains in their interest to remain in the EU or join a new British Isles free trade zone. The assumption has always been Ireland’s main market is the UK. It isn’t. The US is Ireland’s major market (30% odd) followed by Belgium (mainly Pharma and chemicals) with the UK is running third. But as a whole Europe and the UK/US are pretty balanced. Yet, again.. the Irish have played it canny, successful running a special relationship with the US and reaping all the benefits of being in Yoorp.
It’s no wonder the Irish Press aren’t rocking the boat, but I wonder what might have changed if closing the Irish border eliminated 10% of Irish exports at a stroke without consultation? All because no one in Brussels wanted to sign contracts with a UK firm to supply vaccines? (While the French were keen to wait for their vaccines to get the contracts?)
Who is really asking questions in Brussels? It’s a murky work the politics of the European economy…
Five Things To Read This Morning
Thunderer – Post-Brexit Ban on British shellfish could be permanent EU warns Fishermen
WSJ – JPMorgan Banker aquitted in sons and daughters bribery trial
Finance Monthly – What Can Threaten Tesla’s Reign in 2021?
FT – Beijing lays down a market in South China Sea
Torygraph – The Russian pilot who want to make UK a leader in Zero Emission aircraft
Out of time, and back to the day job!
Bill Blain
Strategist, Shard Capital