Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Apple Inc. can do no wrong in either stock or bond markets.

Just witness its share price.

Tech Gunner
Apple's shares have gained more than 40 percent so far this year
Source: Bloomberg

Or look at its growing debt pile, which has managed to leave its credit grade untarnished.

Borrowing Binge
Apple had no debt in early 2013, and now its borrowings stand at more than $100 billion
Source: Bloomberg
Note: The quarters shown here reflect Apple's fiscal year, which ends each September.

But perhaps the iPhone maker ought to be treated with a touch more skepticism. Specifically, analysts ought to be asking whether Apple is acting prudently with its plan to return loads of cash to its shareholders by leveraging up its balance sheet. It's already three-quarters of the way through its plan to give back $300 billion of capital to shareholders by March 2019, and it's financing the bulk of it through an exceptionally pliant bond market.

Loading Up
Apple is set to sell bonds for at least the seventh time this year
Source: Bloomberg

Stock investors love it, of course. Why wouldn't they? Apple is the third-biggest dividend payer in the U.S. behind Fannie Mae and Exxon Mobil Corp., which is music to any investor's ears when bonds are paying historically little. And debt investors seem to be just fine with forking their money over to the company; they've eagerly bought up multiple debt offerings from Apple so far this year, with the seventh 2017 bond sale on track to get the company's usual warm reception. 

Gimme Cash
Apple is the only company that's in the top tier U.S. companies in both share repurchases and dividends paid
Source: Bloomberg
Note: The value of stock repurchases and dividends is over the last 12 months.

This raises longer-term risks and threats to the company that aren't highlighted often, if ever.

As long as Apple keeps churning out loads and loads of cash, all this is fine. Apple generates more cash than any other public U.S. company, and it's spending its money both to invest in its business and to return money to stockholders. Apple's spending on research and development has also increased sharply in recent years, as have its capital expenditures on things like manufacturing equipment, computer centers and its retail stores. In short, Apple produces enough cash to do everything a business is supposed to do: reward its owners, support its existing products and plan for the future.

But can the company keep doing this over the next three decades? That's less certain. The borrowings are already affecting Apple's finances. The company's cash minus debt stands at an impressive $153 billion, but the level has grown more slowly than revenue. Net cash has increased by 15 percent in the three years ended July 1, while sales have increased 21 percent. And its growing debt pile raises the risk of losses to many more individuals if it loses momentum over the next three decades.

Meanwhile, Apple is on the hook for about $2.6 billion a year in interest payments to bondholders, according to Bloomberg estimates, which is negligible now but in any normal universe would be considered a significant cost. That's substantially less than the cost of repatriating the money Apple is keeping overseas back to the U.S. But at some point, it may have a less-robust flow of cash and profits and may look to that stash of liquid assets for help. U.S. lawmakers say they want to make it easier for companies to bring money back home, but they've shown a remarkable knack this year for accomplishing nothing.

IBM is the cautionary tale of a tech company that went too far in rewarding its shareholders. The company was for years among the most active buyers of its own shares. A few years ago, however, investors turned on the company's tactic and said it propped up IBM's earnings per share and diverted cash that could have been better used to invest in the business. Apple is no IBM, but it's worth noting that investors didn't gripe about IBM's share repurchases until it was clear the company's revenue was consistently shrinking. Apple isn't in that position. Yet. 

While Apple is a technology Goliath now, there are real questions about whether it can continue to dominate in the same way over the next three decades. Its current plan makes sense, but investors ought to question the prudence of packing debt onto a company that operates in a highly competitive and mercurial industry that hasn't been tested over a far-reaching horizon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net