Why Apple -- cash-rich and debt-free -- is going to borrow money

The Apple logo is displayed on the exterior of an Apple Store on April 23, 2013 in San Francisco, Calif.

Apple hasn’t been so good to shareholders recently, if you consider that its stock traded at $700 a share in September and closed at $405 today. And, that’s fresh off news that the Silicon Valley giant’s quarterly profit fell for the first time in 10 years.

But Apple has a plan to make things up to its loyal investors: It will pay out $11 billion in dividends this year set aside $60 billion to buy back its stock -- which, in theory will bolster the share price.

So here’s a puzzler: Why is the company -- which is sitting on $145 billion in cash and famously has no debt -- going to borrow money?

It’s cheaper, says Steve Kaplan, a professor of finance at the University of Chicago’s Booth School of Business.

“Some of this cash is sitting offshore, and because of the complicated tax law that we have, when they bring some of the money back intothe United States, they pay an additional tax,” he says.
 
This is not just an Apple problem. American companies, including Microsoft, Google and Dell, are estimated to have between $1.5 trillion and $2 trillion in cash overseas. The government says it wants to lower corporate taxes, but these hoards are a stumbling block.
 
Jennifer Blouin, a professor of accounting at The University of Pennsylvania’s Wharton School, says bringing that cash home could prove very expensive for companies.
 
“You know, on average every dime, there’ll be a dime of every dollar that comes home, that will be lost to U.S. taxes,” she says.
 
That dime is the difference in what companies have already paid in foreign tax and what they’d have to pay in the U.S. And in Apple’s case, Blouin says the difference may be more like 25 cents to 30 cents for every dollar.
 
“You can look at Apple’s financial statements and estimate their foreign tax rate that’s being paid on their earnings overseas -- at most it’s maybe a couple of percent,” she says.

The top corporate tax rate in the United States is 35 percent, which is why Apple may be more interested in borrowing money. Interest rates here are at all time lows. This week Nike borrowed $1 billion and it’s paying bondholders less than 3 percent interest. Apple is likely to get as good a rate, if not better.

About the author

Sally Herships is a regular contributor to Marketplace.

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