Being debt-free and scoffing at dividends used to be points of pride for the
best-known tech companies when they were scrappy upstarts.
Not anymore.
Apple is in the process of selling debt for the first time in more than two
decades, following Microsoft, which sold nearly $2 billion in debt last week.
These companies are taking advantage of interest rates at or near unheard-of
lows. Apple's debt is expected to be priced as soon as today.
"It's just free money," says Bill Larkin of Cabot Money Management. "It's very
cheap (to borrow) right now, so companies figure, 'Let's lend to them.'"
But the move of these tech giants to sell bonds is unfamiliar ground, since many
have long prospered by using their cash flow to plow money into their operations
and research.
Big tech, though, is rethinking its aversion to debt for a variety of reasons,
including:
--Irresistibly low interest rates. Companies with the highest credit ratings --
of which Microsoft and Apple are among the tops -- can borrow by paying just
1.47 percentage points more on average than U.S. Treasuries with comparable
lending periods, says Bank of America Merrill Lynch.
That's 27% cheaper than it was a year ago.
"Credit spreads are very narrow," says Jay Mueller of Wells Fargo.
Microsoft sold its bonds carrying an overall rate of 2.41%, with the 10-year
bonds at a 2.125% rate. That's just 0.46 percentage points over the 10-year
Treasury note yield.
--Raising cash in the U.S. to avoid taxes. While tech companies may be flush
with cash, much of the money is overseas, says Jamie Rizzo of Fitch Ratings.
Bringing that cash back to the U.S. would trigger taxes at rates totaling 20% to
25%, he says. Raising money by selling bonds here avoids the need to pay that
tax, he says.
--Desire to return cash to shareholders. Tech companies, especially Apple,
continue to be under pressure to return their record holdings of cash to
shareholders, Mueller says.
Tech companies, including Apple and Microsoft, have been paying dividends,
increasing those dividends or looking to buy back their shares in order to make
outstanding shares more valuable.
Meanwhile, with investors seeking yield amid low interest rates, there's ample
appetite for bonds from cash-rich tech companies, says Diane Vazza of Standard &
Poor's.
So far this year, U.S. companies sold $292 billion in debt, on pace to surpass
the $1 trillion issued last year, Vazza says.
Investors are grabbing up bonds, and big tech is happy to sell to them. "There's
so much demand for credit," Vazza says.
