While investors have been clamoring for the return of a portion of Apple Inc. (NASDAQ:AAPL)‘s $145 billion of cash, it appears that the company is planning on issuing debt to fund this repayment. If you’re scratching your head, wondering why the most cash-rich company on the planet would be taking out a loan, there’s a good reason. U.S. tax law makes a loan the smarter play for Apple and for shareholders.
The new capital plan
When Apple Inc. (NASDAQ:AAPL) announced its most recent operating results, it also rolled out a new capital plan that’s a first foray into addressing the outcry for more money in shareholders’ hands. The company earns a scant 1% on its cash investments, leading many to conclude that the capital should be returned. The “use it or lose it” attitude is largely prompted by the shareholder suit earlier this year that focused on this very issue.
Image: Apple Inc. (NASDAQ:AAPL)
Under the new capital plan, the company will increase the dividend by 15% to $3.05 per share, beginning with the May 16 payment. In addition, the company said it will increase its stock buyback plan from $10 billion to $60 billion by the end of 2015. The total plan is expected to put about $100 billion back into the hands of investors in the next two and a half years. Piper Jaffray’s Gene Munster called the plan a beginning, saying: “They want it all today. They want it faster.”
So why is Apple Inc. (NASDAQ:AAPL) borrowing the money?
To fund a portion of the stock repurchase plan, Apple will issue debt to cover the cost. While it seems unthinkable to borrow money to return to investors rather than tapping the huge cash stockpile on the company’s books, stringent U.S. tax policy is to blame. The U.S. carries a corporate tax rate of roughly 35%, making it one of the highest in the world. More than 65% of Apple Inc. (NASDAQ:AAPL)’s cash is held overseas, meaning that the tax bill of repatriating that much capital would be significant.
Rather than take the tax hit, the company will borrow the money it needs to return cash to investors.