Apple Returns to Bond Market - Wall Street Journal

Updated April 29, 2014 10:01 p.m. ET



Apple Inc. AAPL -0.01% Apple Inc. U.S.: Nasdaq $592.28 -0.05 -0.01% April 30, 2014 9:52 am Volume (Delayed 15m) : 841,247 P/E Ratio 14.11 Market Cap $510.22 Billion Dividend Yield 2.21% Rev. per Employee $2,187,330 04/30/14 Data Point: Tablets Cooled Dow... 04/30/14 The Morning Ledger: EBay Bites... 04/29/14 Intuit in Talks to Buy Mobile-... More quote details and news » completed its second blockbuster bond sale in a year, tapping robust investor demand that has propelled corporate debt in 2014 to a larger gain than U.S. stocks.


Cupertino, Calif.-based Apple sold $12 billion of debt of varying maturities at interest rates that were mostly less than a percentage point above comparable U.S. Treasury debt, highlighting widespread faith in the iPhone maker's prospects. Investors flocked to the offering, placing more than $40 billion in orders.


The company sold the debt a week after expanding its share buyback and increasing its dividend in a bid to reward shareholders. The tech firm sold a then-corporate-record $17 billion of debt last April. At $512 billion, Apple is the most valuable U.S. firm by stock-market value.


Tuesday's sale comes at a time when returns on investments perceived as safe are low and the economy is expanding at an uneven pace.


"The bonds are an attractive alternative to Treasury bonds," said Chuck Burge, head of U.S. investment-grade credit at Invesco, who planned to spend $100 million on the new Apple bonds. "Apple is a brand name everyone knows about."


The demand for Apple's bonds, which are rated double-A-plus, the second-highest rating, reflects a corporate-debt market that is putting in a surprisingly strong performance this year. Bond investments broadly declined last year amid investor expectations that the U.S. economy would pick up steam.


The total return for high-grade corporate bonds is 4.03% this year, according to Barclays, compared with a total return of 1.76% for the S&P 500. Total returns reflect changes in price and interest or dividend payments.


U.S. high-grade corporate debt now is yielding just 1.01 percentage points more than U.S. Treasurys, for the first time since 2007, and down from 1.14 percentage points at the end of last year. Narrower spreads generally reflect higher prices.


Just last week, analysts at Barclays said they expected bonds from investment-grade companies to return 1.50 to 2.00 percentage points more than Treasurys, up from the 1.25 to 1.75 points they forecast in December.


The gains show how large U.S. companies continue to reap the fruits of an economic expansion that is in its fifth year and low interest rates thanks in part to the Federal Reserve's easy-money policy.


"A lot of it is driven by the fact that fundamentally, these companies, they're still doing quite well," said Shobhit Gupta, a credit strategist at Barclays.


With the $12 billion sale, Apple becomes the latest company to sell bonds to pay for share buybacks and dividends, effectively raising money from bond investors and giving it to shareholders.


This year, companies such as Gilead Sciences Inc. and AutoZone Inc. sold bonds and said proceeds could be used for share repurchases.


While Apple still has a healthy cash pile—it reported about $150 billion in cash and securities at the end of March—some investors fear that selling bonds to reward shareholders can ding the value of a company's outstanding debt.


"Over the next 10 years, can Apple keep the iPhone relevant and a leading product?" said Leon Burger, a senior credit analyst at Principal Global Investors.


But Mr. Burger's firm put in an order for the debt on Tuesday. He pointed out that Apple's cash pile helps assuage any significant concerns, at least for now, and that Apple debt has so far lagged behind the rest of the market, so "there seems to be more value in Apple bonds."


Apple's bond deal last year remains the second largest on record, after a $49 billion sale last September by Verizon Communications Inc., VZ -0.28% Verizon Communications Inc. U.S.: NYSE $46.64 -0.13 -0.28% April 30, 2014 9:52 am Volume (Delayed 15m) : 806,583 P/E Ratio 10.43 Market Cap $193.67 Billion Dividend Yield 4.54% Rev. per Employee $689,751 04/29/14 Apple Returns to Bond Market 04/29/14 Holman Jenkins: How to Think A... 04/29/14 Sprint Loss Narrows, But Custo... More quote details and news » according to data provider Dealogic.


The bonds sold Tuesday offered interest rates relative to Treasurys that were similar to last year's sale. For example, a 10-year bond from Apple on Tuesday was priced to yield 0.77 percentage point more than comparable Treasurys. Last year, Apple priced 10-year bonds to yield 0.75 percentage point more.


In all, Apple sold fixed-rate bonds maturing in three, five, seven, 10 and 30 years, and were priced to yield 1.068%, 2.108%, 2.889%, 3.460% and 4.483%, respectively. Deutsche Bank AG and Goldman Sachs Group Inc. led the sale.


Apple also offered floating-rate bonds with three-year and five-year maturities, which were priced to yield 0.07 and 0.30 percentage point more than the three-month London interbank offered rate.


Apple's stock fell $1.76, or 0.3%, to $592.33, in 4 p.m. trading.


Not all investors dove into the new debt offering. Brian Pollak, a portfolio manager at Evercore Wealth Management, said his firm sat out the offering because he expected rates on Treasurys to still rise this year as the economy improves.


The yield on the 10-year Treasury note was at 2.695% late Tuesday, down from about 3% at the start of the year. It hit about 1.6% in May 2013, but yields rose when the Fed indicated it would soon start curtailing its bond-buying program.


The reversal underlined the risks always facing bond investors, Mr. Pollak said. "Last year, people started getting complacent about it, and then it kind of smashed everybody in the face," he said.


—Min Zeng contributed to this article.


Write to Mike Cherney at mike.cherney@wsj.com







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