Why Apple should take on debt

Apple Inc. could be on the brink of leveraging up its balance sheet in a big way.

J.P. Morgan analyst Mark Moskowitz thinks a more shareholder-friendly capital allocation program could recast Apple to a wider range of investors.

Specifically, he suggested that if the company issues US$15-billion in debt this year, the dividend yield in this ?New Apple? scenario could rise to 4% from 2.6% currently.

Mr. Moskowitz also noted Apple?s share buyback activity could nearly double from current levels.

?With the company?s cash pile growing and historically low borrowing rates, we think that investors should start to consider what the expanded cash uses could be if Apple takes on $15 billion, if not $20-25 billion, in unsecured debt in the near to mid term,? the analyst said in a note to clients Thursday.

Mr. Moskowitz believes leveraging up could make Apple more focused on monetizing product innovations and greater shareholder returns, while the additional debt wouldn?t jeopardize the company?s US$137-billion cash cushion.

Based on his estimate of the annual interest payment on the debt, the increased dividend payments and the buyback boost, Apple would still have US$20.2-billion in excess free cash flow.

?In other words, Apple could generate plenty of excess cash to fund the business, make acquisitions, and retire any debt, if necessary,? the analyst said.

Source: http://business.financialpost.com/2013/04/18/why-apple-should-take-on-debt/

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