Apple: Beg, Steal, or Borrow


Don't be lulled into complacency by Apple's 7% pop this past week. The current quarter is shaping up to be horrendous. Dreams of seeing Apple innovate its way out of its current rut are apparently at least months away from materializing. Oh, and then there's the tech bellwether's vow to take on new debt in an ambitious plan to return more money to its stakeholders.

Washington Post columnist Allan Sloan points out that the ultimate advantage of having Apple borrow money to bankroll its beefed-up $60 billion share-buyback authorization rests in the taxable implications of the strategy.

It does makes sense on paper. Apple's stock is now yielding 3%, and its creditworthiness would probably mean that it could take on debt in this low-interest-rate environment at about the same rate. Sloan then rightfully points out that the interest Apple will pay on the debt is tax-deductible. Dividends suffer the double-taxation hit of smacking corporations and then recipients. In short, borrowing money at 3% to buy out shares yielding 3% will save Apple -- and its stakeholders -- money.

However, this still doesn't address the matter that Apple does have the money itself. Yes, two-thirds of its $145 billion cash position is stashed away overseas, and the government's tax laws on repatriated funds will keep it that way. That still leaves a lot of money for it play with on these shores, and Apple continues to print greenbacks with every passing quarter. Even with margins and profitability contracting this past quarter, Apple still managed to generate $12.5 billion in cash from operations. Yes, a lot of that is being generated overseas, but the point is simply that Apple continues to pad its balance sheet with the money it would need to return money to its stakeholders.

Apple can't buy its way out of this rut
In the end, it's not as if bigger dividends and aggressive share buybacks will cure Apple's woes. Sure, the dividend increase will woo income investors, and the stock repurchases will pad profitability on a per-share basis. But at the end of the day, Apple's fundamentals will have to improve for investors to truly believe in Apple again.

The new quarter is going to be a mess. Apple's top-line range suggests that year-over-year revenue growth will be flat during this fiscal third quarter.

It could be worse, though. Analysts see Nokia revenue slipping 11% this quarter on the way to a loss on the bottom line. A gross-margins contraction in this scenario will result in another quarter of declining profitability at Apple, but that could also be worse. BlackBerry "believes it will approach breakeven financial results" this quarter.

However, at least the BlackBerry camp has new products that it can pin its hopes on. BlackBerry even alluded to improving hardware margins for the current quarter, and Apple isn't there yet.

"Our teams are hard at work on some amazing new hardware, software, and services that we can't wait to introduce this fall and throughout 2014," Apple CEO Tim Cook said during Tuesday's earnings call.

This fall? Does that mean that any confidence-boosting catalysts, including the iPhone 5S or rumored HDTV and smart watch announcements, are at least four or five months away? Will these updates and new product categories even improve the trend of cascading margins?

Yes, Apple exited the week with more question marks than it had when it started. The share price still moved higher, and there's a valid argument to be made that Apple's stock had just gotten too cheap for what remains the most profitable consumer tech company in the country.

But it's still not safe to exhale, Apple investors. Apple still has a lot to prove.

It's going to be a fierce fight
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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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