The Trillion Dollar Boost

If you ever want a demonstration of the utter stupidity of most taxes, and the general insanity of the financial system, Apple just gave it to you. The company is raising €2.8 billion from investors. What the…? This is a company with $US150 billion on its balance sheet.

What does it want to do with the money raised? According to The Wall Street Journal, ‘Apple spoke with investors on Monday about issuing bonds and will use the proceeds of the sale for general corporate purposes, including share buybacks and dividend payments.

That’s the absurd US tax system at work. Because most of the money on Apple’s balance sheet is held offshore from the US in foreign subsidiaries — $137 billion according to CNBC — it’s actually cheaper to raise money than pay taxes to repatriate its existing cash pile. Apple did the same thing in April of this year and 2013.

Nominally, of course, the story is noteworthy because it’s the first time Apple will issue euro bonds. The maturities are eight and twelve years, with the yield on the debt 1.082% and 1.671% respectively. These rates are the lowest ever for euro corporate debt. Apple is actually paying less than Spain and Italy.

Rates in Europe are lower than in the US and, of course, Australia. I’m sure you don’t need me to tell you the RBA left rates on hold again yesterday. The Australian Financial Review reports this morning: ‘Economists are widely divided on when the Reserve Bank will start the process of normalising policy.


That, of course, will largely depend on what the US central bank does. But what exactly is ‘normal’ anyway? As far the US is concerned, it depends on what period you look at. For example, the yield on the current 10 year Treasury is 2.33%.

If you look back from around 1980, that’s low. Interest rates have been trending down for over thirty years. But it might be a long while yet before they rocket back up to the lofty heights when Paul Volcker was Chairman of the Fed.

Long term low rates have happened before. The average rate for the 1930s was 2.98%. In the 1940s, it was 2.54%. And in the 1950s, it was 2.99%. That’s thirty years with an average rate under 3%. Who’s to say that can’t happen again?

Of course, ongoing low interest rates will keep everyone on the hunt for companies that can pay a decent dividend. According to Meagan Evans, the Investment Director of the Albert Park Investors Guild, yield is exactly what members are searching for.

If you’re interested, in the latest issue of the Guild, Meagan’s uncovered a compelling income play after digging behind the obvious headline numbers to find a company with a history of paying special dividends.

From Meagan:

These dividends have ranged from $1.20 to $4.50 per share, for an average special dividend yield of 7.4% per year. So unlike what the mainstream financial media is reporting, [the] dividend yield is not in fact 1.9%. Shareholders can expect a 1.9% regular dividend yield, plus, an average 7.4% special dividend yield. That’s a 9.3% dividend yield when you sum the parts.

I should add that Meagan is not recommending the company on this factor alone. It has to tick all the other right financial metrics as well.

Of course, there’s no guarantee the company in question will continue to pay the special dividends. They’re discretionary payments management make based on the company position and outlook.

But it’s where the company operates that’s interesting. I’m sure Meagan won’t mind me mentioning the fact the company operates in the retail space in North America. Your first reaction might be to assume that’s not the best place to be operating right now. But the company’s been growing revenues through the ‘great recession’, and now we have West Texas Intermediate oil trading at $US77.29

Why is the price of oil important? Because lower oil prices will be hugely beneficial for buyers; that’s consumers like you and me mostly.

According to MarketWatch, with ‘gas’ in the US under $3 a gallon — the cheapest it’s been since December 2010 — US consumers save $250 million a day. Lower oil prices are a trillion dollar boost to the US economy. It is difficult to think of anything that would have a bigger beneficial impact.

The mid 1980s oil price collapse kicked off a huge economic and stock market comeback. Oil prices were at 10 bucks per barrel back then. Low oil prices saw stronger stock markets. If oil prices stay low from here, it should prove hugely bullish for stocks over the longer term, too.


Callum Newman+
For Markets and Money

Join Markets and Money on Google+

Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money