Friday, June 16, 2017

Apple: Being Green

By pledging to invest in energy projects, Apple is, in effect, getting into the energy business.
With the assistance of big banks Goldman Sachs, Merrill Lynch, and JPMorgan Chase, in early June, Apple, the iPhone giant, borrowed $1 billion, payable in 10 years.

That should not have been a notable news item.  The company now has about $99 billion in debt and abundant resources from cash flows and cash sitting in accounts around the globe to be able to manage the new billion and all other debt.

Financial analysts often try to sniff out how much cash the company has.  Is it $65 billion it has on hand on U.S. balance sheets, or does it have over $200 billion in cash-like assets squired away on balance sheets off-shore and in far-flung subsidiaries--cash it apparently maintains outside the purview of U.S. tax collectors? Which is it?

In its post-Jobs era, the company borrows substantially and does so for familiar corporate-finance reasons (pay down other debt, pay dividends, invest in new projects, buy back stock, etc.).

This new offering has a special purpose and proves Apple is gradually getting into the renewable-energy and conservation businesses.  The new offering is being called a "green bond" and adds to an existing green bond on its books ($1.5 billion). Hence, it has $2.5 billion in "green bond" liabilities.

Bond proceeds will be directed to an Apple-managed fund, which has been and will continue to make investments in wind farms and solar plants, renewable energy, and projects related to energy efficiency and reductions in carbon emissions. It is advancing its initiative to not only ensure that its supply chain and whole organization are run on sustainable energy, but also to invest in other projects, as well.

In other words, it's taking a lead in becoming a behind-the-scenes energy company.  That's similar to the fact that, in 2017, all large companies, whether they are in consumer goods or financial services, are now, in essence, technology companies in various degrees.

Sooner or later, most large companies operating in all kinds of industries will have evolved into energy companies, as they make decisions and investments about how energy is sourced and used within their operations.

Apple didn't hide that this new green bond is timely, coming in the wake of the White House's withdrawal from the Paris climate and emissions initiatives this spring.  Apple and other large companies have decided to provide energy and climate-concerns leadership, if the U.S. Government lags.

In effect, Apple, via its fund, will become a merchant bank for energy projects. It assumes a role, where other banks might still be reluctant or shy, because of inherent risks or no guarantee of sufficient returns. It will have borrowed $2.5 billion-plus, invest in an internally managed fund, and support projects based on criteria to keep the "green" label attached to the bond. It also hopes to invest prudently.  While Apple has the right spirit and mind, it won't be giving away the funds and would expect to generate reasonable returns in whatever forms of investment it takes on (equity, debt, notes, loans, etc.)  Shareholders will hold Apple to that standard. 

Could Apple do more? Yes, it has the resources.  Yet it likely wants to set the model and encourage other companies to do the same.  Should it do more?  Some will argue Apple should be applauded, but should continue to focus on what it does best or focus on the next generation of Apple products.  Some will access whether shareholders will be disadvantaged. (Some Apple shareholders will say they themselves can choose to invest in energy projects or companies with special expertise and focus on energy.)

With the new debt and the mountain of existing debt, no one questions Apple's debt burden.  The company continues to generate gobs of cash everyday, although trends over the past year showed declining levels.  The company generated about $65 billion in operating cash flow last year (new cash beyond what already existed on the balance sheet), although most of that ($41 billion) was generously returned to shareholders (dividends and stock buy-backs). 

It continues its strategy of holding on to the $200-billion-plus in cash on the balance sheet and tapping new debt to support ongoing investments, capital expenditures and operating cash flow to reward stock investors. It has decided there is no value yet in reducing the overseas cash reserves, especially in an environment where debt costs are still low and where it can borrow easily with its Aa1 credit rating. (Note Apple does not have a AAA rating.)

After years of avoiding debt financing, the company is accustomed to it.  Debt levels have risen from $16-99 billion in just four years. With such increases, the company's book equity ($134 billion) and market value ($745 billion) have soared, too, over the years. Analysts and some observers might be concerned (as they should be) about recent declines in revenues, earnings and cash in fiscal-year 2016.  (Revenues fell 8%, and earnings dropped 15%.) Stock values have been satisfactory, despite the declines, as shareholders seem confident the company will figure its next steps (or new products or variations of old products) to spur growth.

Now in the energy business with its energy-related fund (and emboldened by high standards and expectations for itself and all companies), Apple, we can bet, won't likely share in-depth details about its energy portfolio (amounts, returns, performance, risks, concerns, shortfalls, etc.) on an ongoing basis, and it may not even have lofty objectives regarding investment returns. It may, in fact, be trying to do its part when it appears Washington is taking a back seat.

Tracy Williams

See also:

CFN:  Apple's stash of cash, Buffet's investment in Apple, 2012-2016
CFN:  Apple With All That Cash, 2013

No comments:

Post a Comment