Bond sales as a means of funding share buyback and dividend payments can be a strategic approach to expanding cash flow and beating down cost of capital. If Bond sale becomes cheaper than other components of capital, it becomes prudent to sell.
A buyback, also referred to as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available to the open market.
Apple Inc. is tapping the high-grade bond market with a sale in as many as four parts. The longest portion of the offering, a 40-year security, may yield around 150 basis points over US Treasuries, according to business intelligence. Proceeds from the sale are earmarked for general corporate purposes, including the financing of share buy-backs and dividends.
Bond sales as a means of share buybacks and/or dividend payment become attractive when supply is high and the price is low and also when dividend payout has become a drain on the needed investment funds.
The attractiveness is further heightened when there is confidence in expanding cash flow rather than operational needs. According to Bloomberg Intelligence analyst, Robert Schiffman “Apple consistently borrowing tens of billions of dollars annually is due more to its confidence in expanding cash flow than operational needs”.
High credit rating influences the choice to use bond sales as a means to finance buybacks. Recently, Apple’s long-term credit was upgraded to AAA by Moody’s Investors Service, putting it in an exclusive club with Microsoft Corp and Johnson & Johnson as the only US corporations in the S&P 500 with the highest possible credit rating.
Stability and relatively cheaper cost of funding in the corporate market always makes it a more favorable option.
When the yield on benchmark investment-grade index for companies is low, it can be taken as an advantage to sell new high-grade bonds as well to fund buybacks.