Apple Gains Strategic Advantage With €1 Billion In European Bonds

The brains trust behind Apple (NASDAQ:AAPL)  is in the process of raising an additional €1 billion of capital by way of euro-bonds. This latest initiative by the technology giant is a financial work-of-art, since it guarantees Apple access to an ever-increasing European investor base with cheap capital. This is especially true if one looks at the 12-month price target range as estimated by sell-side financial analysts – the consensus figure is $150. Presently, the price of Apple stock is $115.05, and the company has a market capitalisation of $656.10 billion, with a Price-Earnings Ratio of 13.31, and Earnings per Share of $8.65.

Should Apple hit its consensus figure, the company expects to generate approximately 30% return over and above the current stock price, and it can do so with borrowed money that it is only paying a 2% premium on at most. This is the beauty of Apple's strategy, and it is the perfect opportunity for traders and investors to get behind Apple over the next 12 months with call options. Apples top-level managers realise the windfall profits that stand to be made by repurchasing stocks, and repaying 8-year bonds at less than 2%. The rate is not too much higher for 12-year bonds that are being issued in Europe.

What does Apple do when Share Prices Plunge?

Past trends tend to repeat themselves, time and again. In fact with Apple, the modus operandi is well documented. Back in January of 2014, Apple stock plummeted. This came hot on the heels of the latest earnings release at the time, and Apple's share price was reduced by $10. Determined not to allow momentum to build, Apple Inc immediately invested $18 billion in cheaper Apple stock to drive up demand and shore up investor sentiment. The net result was a windfall win for the company. The share price rose and profits were generated for shareholders. Recently however we have seen a downward revision in the price of Apple stock.

For the year to date, the stock has only appreciated 4.33%. The 52-week high is $134.54 and the 52 week low is $114.86. Clearly Apple is trading near its lowest point in 52 weeks. The release of the iPhone 6S and the iPhone 6S Plus have been unable to counteract the declining sentiment that has plagued Apple stock this year. It is true that Apple has tens of billions of dollars in cash flow, but yet it still continues to borrow billions of dollars from investors in Europe, Japan, Australia and the US. Apple is using this money to repurchase stocks, fund capital expenditure, upgrade its product lines, make dividend payments, work down its debt, etc. Already Apple Inc has purchased $90 billion worth of its own shares, with plans to spend an additional $50 billion over the next 7 financial quarters.

Clearly, everyone with excess funds to spend is going long on Apple because the brains trust at Apple is banking on the company's profitability moving forward. And they're using everyone else's money to make money. After earnings results are posted in October 2015, many analysts are expecting Apple to make large buybacks. Bullish sentiment pervades the equities markets for technology stocks like Apple. When share prices start to dip, and Apple starts to buy back shares, this benefits long-term shareholders. Apple has leveraged markets to the maximum: It is borrowing capital at near-zero interest rates and generating returns in the region of 20% to 30% on the appreciation of its own stock. With nothing else to do with its billions of dollars in the bank, betting on itself seems like the most lucrative alternative. US tax regulations aside, Apple is still profiting from foreign capital being used to buy its own shares. It is clear that the EPS estimates have been beaten by actual figures time and again – Apple and its shareholders will be looking for a similar pattern come September 2015, and December 2015.

The issuance of bonds is something that companies like Apple routinely do from year to year. In 2014, Apple sold bonds worth an estimated €2.8 billion, with maturities of 8 years and 12 years. These bonds derived yields for investors of one percentage point on the 8-year bonds and 1.6 percentage points on the 12-year bonds.  This latest round of bond issuance in Europe is likely to yield interest repayments to investors 95 points above prevailing rates for 12 year bonds and 60 points above prevailing rates for 8 year bonds. According to Bank of America, Merrill Lynch, standard yields on investment-grade corporate debts are in the region of 1.37%.