Tuesday, April 30, 2013

Buy A Company's Bonds or Buy Its Stock? ... The Apple Example

Apple is going to borrow $17 billion in various maturities.

Apple stock has been going up in a straight line for the past week.

Which is the better decision, to buy Apple bonds or Apple stock, and why?

It's a no-brainer. Buy the stock for higher current cash payments in the form of dividends, higher future cash payments in the form of growing cash dividends due to future earnings growth, and a future higher stock price due to both higher future earnings and a newly enhanced $60 billion stock repurchase program by the company.

Should you buy Apple bonds? has this summary of the situation:

"Apple’s first bond sale in more than a decade is sure to get attention. But pros say most investors will want to stick with the stock.

The maker of iPads, iPhones and Macbooks made headlines Tuesday saying it planned to sell $15 billion to $17 billion worth of bonds as part of its strategy to return profits to shareholders. Apple’s devoted customers have shown a willingness to buy almost anything that company offers. But with yields on high-quality corporate bonds so meager, many financial advisers think investors should be wary of adding more of these to their portfolios.

Market chatter reported by the Wall Street Journal suggested Apple’s bonds would pay about 0.9% to 0.95% more than 10-year Treasurys. But yields on those benchmark bonds recently fell to 1.64%, their lowest of the year. By comparison inflation is about 1.5%.

“While the credit quality is excellent, the yield is still very low.” says Brian Kazanchy, a wealth advisor with RegentAtlantic in Morristown, N.J, which oversees $2.5 billion. “It’s not something I would be particularly interested in.”

To be sure, Apple’s bonds have some attractive features. They will be rated Aa1 by Moody’s and AA+ by Standard & Poor’s—just a notch below these agencies’ top ratings. One key reason: Despite operating in the fickle personal computer business, Apple’s $140 billion cash hoard makes even $17 billion look easy to repay. . . .

A bigger problem, however, is the broader interest-rate environment. While the Federal Reserve has been holding rates down to spur economic growth, that won’t last forever. When rates climb, bond prices fall, meaning investors in Apple bonds could lose money even if the company’s next big product is as big a hit as the iPhone or iPad. . . .

With Apple’s stock at roughly $444, a third below its high of more than $700 last fall, many say the company’s stock has more upside for investors. Indeed, John Kozey, a senior analyst for Thomson Reuters, says he thinks Apple’s shares still deserve a price tag of more than $700. “Apple remains a very powerful cash generator,” says Kozey."

Summing Up

Being an owner is preferable to being a lender.

An owner participates in the upside earnings of a company, including increased cash dividends and higher share prices.

A lender just gets the agreed upon interest rate during the loan's duration and then his money back when the loan is repaid.

For individual investors, owning stock in a company beats owning a company's bonds.

The current Apple situation proves the case. Apple's current cash dividend yield is higher than the interest it will pay on its ten year bonds.

To repeat, it's a no-brainer. At least that's my take.

Thanks. Bob.

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