News this week broke that both Apple and Meta are both taking out huge loans.
Apple is borrowing $5.5 billion, and Meta is borrowing $10 billion. Both are for “general corporate purposes, share repurchases, and dividends” which is boilerplate for “whatever we decided to do with it” because that pretty much covers what you can do with the money.
If you wish, you can choose to lend Apple and Meta some cash by investing in these bonds. However, these companies’ favorable credit ratings mean that the interest (under 1.5%, at least on Apple’s) is not as favorable as a bank savings account in most cases. The payback is over 40 years, so people buying these bonds are assuming that Meta (a company that has been in business for 18 years) will still be able to pay in 40 years (2062). Meh.
Do these companies need the money? Hardly. At last report, Apple had $48 billion in cash and short-term investments and Meta has $40bn in cash.
So…why borrow? It’s complicated.
First, when companies borrow, say $10 billion at 1.5% interest, you would think that they’d pay $150m (1.5%) every year in interest. They do in one sense, but not really overall, because that interest is a business expense. When profit is calculated for the year, that profit number is what’s taxable. Interest expense is subtracted along the way, so in effect, if the effective tax rate is, say, 20%, then for every dollar Apple or Meta sends to the bank, they get 20 cents back from the government due to lowered taxes.
But more importantly, a lot of that cash is overseas and bringing it back to the US causes taxable events. It’s much cheaper to issue debt in the US and pay it off because they’d pay much more than 1.5% in taxes.
So as these companies produce cash, they want to return some of it to their shareholders, but largely because of tax reasons, they issue debt.
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