Last week I wrote about Apple Stock (AAPL) – Get the Apple Inc. report in the context of recent interest rate hikes. Among the reasons the stock price has risen lately despite monetary tightening is the Cupertino company’s balance sheet. Here is the quote:
“In a high interest rate environment, more indebted companies may suffer from the higher cost of servicing their debt. Higher interest paid means lower net income and EPS. But Apple does not have this problem. The company has [much] more cash and cash equivalents on its balance sheet than debt.
The article prompted a few questions: Wouldn’t high interest rates still have a disproportionate negative impact on Apple’s large debt balance relative to its cash? I decided to dig deeper into this topic today.
To be clear, I will focus here only on the impact of rising interest rates on Apple’s balance sheet. The broader effect of rising rates on the company’s core business and on the global economy as a whole is the subject of a different conversation.
(Learn more about Apple Maven: Why Apple Stock Rebounded After Recent Interest Rate Hike)
Apple: a look at the company’s debt
Let’s start at the top: In the third quarter of the current fiscal year, Apple had approximately $59 billion in net cash, broken down as follows:
- $179 billion in cash, cash equivalents and marketable securities
- $120 billion in term debt and commercial paper
Think for a moment about personal finance. Apple’s cash and debt mix would be like someone who has money in a checking account and a savings account, but also has a credit card balance or loans. personal. That makes sense for Apple, but not so much for individuals, largely due to the complexity of the company’s global operations.
Coming back to personal finance, it is reasonable to assume that the interest a person pays on a loan would be considerably higher than the interest earned on cash. Think about credit card rates versus savings accounts, and how the former tend to be much wealthier than the latter.
But that’s not quite the case for Apple. According to the last annual depositthe company’s weighted average interest rate on its commercial paper in 2021 was just 0.06%!
Of course, the lowest rate is associated with short-term borrowings. Apple has debt maturing in 2061 that was issued last year and has a higher effective interest rate of 2.9%. Yet that number is staggeringly low compared to Treasury bill rates which currently hover just below 3% (admittedly, they were lower in 2021 when the debt was issued).
Apple is likely able to borrow at such low rates due to the company’s credit quality and lower perceived risk.
The majority of Apple’s term debt matures in 2027 or beyond, which is 5 years at the earliest. Since the interest rate on nearly all of Apple’s debt is fixed (i.e., not floating), the rate hike is actually good news for the company’s balance sheet. . This is true because the debt is fixed at the generally lower interest rate and most of it does not need to be rolled over for a few years.
Apple: A look at the company’s cash flow
On the cash and cash equivalents side, Apple holds the following instruments, among others:
- $13 billion in cash, $11 billion in money market funds and $3 billion in CDs
- $10 billion in Treasury bills and $9 billion in short-term corporate debt
- $74 billion in corporate debt, $35 billion in treasury and agency bills, and $21 billion in asset-backed securities, all long-duration
As Apple refreshes its portfolio above in a higher rate environment, interest income should improve.
In fact, 10-year Treasury yields (a proxy for interest rates) began to rise more decisively in the second half of last year. Since then, Apple’s interest income bottomed out at $650 million in the last quarter of the year and has since risen to $722 million in the last period, despite the declining balance. gross cash due to an aggressive share buyback program.
It’s hard to say for sure how much Apple can earn in net interest income as rates rise. But a clue can be found in the following statement from the company’s latest report Form 10-K:
“A 100 basis point increase in market interest rates would result in interest expense on the Company’s debt as of September 25, 2021 […] increase by $186 million […] on an annualized basis.
I believe the dollar figure above is small compared to Apple’s $24 billion in cash and “level 1” money market balances alone. A 100 basis point rate increase applied to $24 billion would amount to about $240 million, which would more than offset the additional cost of debt. And that’s assuming that Apple’s other cash-like securities wouldn’t generate P&L benefits either.
Could Apple stock benefit?
Another interesting question to answer is whether Apple’s stock price could rise as interest rates rise and net interest income rises. In my opinion, the impact on the bottom line could be noticeable, but probably not significant. Every $160 million in additional net income is enough to drive Apple’s EPS up 1 cent.
However, I wonder if investors would ever give Apple enough credit for the revenue it can generate from its financial assets compared to what the company produces from its operations. The latter is much more likely to boost investor sentiment and, therefore, stock price movements.
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(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links. These partnerships do not influence the editorial content. Thank you for supporting Apple Maven)