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Apple Is Borrowing Money to Buy Back Stock. What That May Say About the Bond Market.

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A new Apple store in London, shown in late July.

Dan Kitwood/Getty Images

Apple is gearing up for a four-part bond sale to fund stock buybacks.

Apple (ticker: AAPL ) is planning to use the proceeds from the sale for general corporate purposes, including buying back shares and paying dividends, the company said in a filing with the Securities and Exchange Commission.

The bond maturities range from seven to 40 years. Apple didn’t disclose how much money it was raising or what interest rates it will pay, but the latest report from Bloomberg said the offering was for $5.5 billion. Goldman Sachs , BofA Securities, and J.P. Morgan are leading the offering, Apple said.

Bond issuance has long been a key capital-raising strategy for Apple. The company executed a similar offering in July 2021, selling $6.5 billion of notes in four parts, and as of June 25, 2022, it had $94.7 billion in long-term debt outstanding.

Shares of Apple were down 0.8% on Monday. The credit-rating company Moody’s upgraded Apple’s long-term rating to AAA in December. This is Moody’s highest rating, awarded only to companies with the lowest level of credit risk. Only Microsoft ( MSFT ) and Johnson & Johnson ( JNJ ) have the same rating among U.S. companies in the S & P 500.

To some, Apple’s debt issuance could suggest that bond yields — and interest rates — might still be too low, given that the company still perceives credit as an attractive option. To be sure, the yield on the 10-year Treasury declined 0.33 percentage point to 2.64% in July, the largest one-month yield decline since March 2020.

But for bond expert Martin Fridson that doesn’t seem to be the case.

“According to J.P. Morgan’s 5-year TIPS breakeven model, investors currently expect inflation to be at 2.8% in five years. That’s above the Fed’s 2% stated target, but I don’t think most market participants consider it alarming,” Fridson said.

“So if the Fed funds is still somewhat below the optimal level, the gap doesn’t appear to be huge by this line of reasoning.

That said, he predicts rates will keep increasing, which may have motivated Apple’s issuance.

“It’s possible the CFO reasoned that it’s likely rates are heading higher; this looks like the best opportunity we’ll have to borrow to repurchase stock for a long time, so let’s take advantage of it,” he said.

In addition, the company may be taking advantage of low yields specifically for high-quality credit issuers, Fridson said. In July, the yield for AAA-rated companies fell by 31 basis points, according to ICE Indices, which is the biggest one-month drop since August 2019. For an AAA-rated company like Apple, this could be a tax-efficient way to send a positive message to shareholders, he added.

Write to Sabrina Escobar at sabrina.escobar@barrons.com