Apple’s $17bn (£11bn) corporate bond issue on 30 April stands not only as the largest in debt market history but also as a stark reminder the rules of value investing apply every bit as much to fixed income as they do to equities. If you overpay for something, you are highly unlikely to see the returns you expect and, after just six weeks, Apple’s bond investors were nursing losses of up to 9 per cent.
There are a number of ways to put that in perspective, one of which is that 9 per cent effectively amounts to nearly four years’ worth of coupons – that is, interest payments – on the bonds. Given how low the yield was pitched in the first place, investors simply cannot afford to suffer those sorts of setbacks.
You could also compare the prices of Apple’s bonds and equities and ask what needs to happen to the company’s share price to make the outcomes for both assets the same. Since we know the coupon and we know when the bonds will mature, we are able to calculate, for example, that investors who bought Apple’s 10-year debt at issue and hold it to maturity will make about 2.7 per cent a year.
Turning to Apple’s shares, given how cash-generative the business is, in a scenario where it never sees any sales growth or profits growth again, then your profit multiple would have to fall by some four-fifths to make the outcome the same.
Alternatively, Apple’s profits would have to halve from today’s level to make the outcome the same and, while neither of those scenarios is completely impossible, it certainly takes a pretty bearish outlook to make the bonds seem a more attractive investment than the equities.
As a final point, even though the Apple issue was the biggest-ever corporate bond offering, such was the demand – particularly from private investors one might characterise as ‘debt-market tourists’ who only wanted to buy in on account of the brand involved – the company could actually have sold some $52bn-worth if it had wanted to.
“Be fearful when others are greedy and greedy when others are fearful” is one of Warren Buffett’s best-known exhortations – and a situation where a company could have sold its debt three times over hardly smacks of fear. Those investors who were successful in subscribing to Apple’s bond issue may now be feeling they would have got better value sticking to buying its products.
Andrew Lyddon is a fund manager in Schroders’ UK value team and writes at The Value Perspective