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By Michael Dimler, CFA | 09-05-2017 12:00 AM

Assessing Apple's Credit Strength Ahead of iPhone Launch

Slowing revenue growth, high product concentration, and use of debt to fund share repurchases negatively impact the firm's credit strength.

Michael Dimler: With the Sept. 12 iPhone 8 release coming up, we offer a review of Morningstar's corporate credit rating on Apple Inc. We assign an AA- rating to Apple, which reflects our assessment of moderate business risk. We also consider Apple's strong solvency and cash flow cushion rankings, which are supported by high returns on invested capital and strong financial flexibility. However, we believe Apple's credit strength is negatively impacted by slowing revenue growth, high product concentration, and management's increasing use of debt to fund share repurchases.

Despite multiple product introductions in recent years, including the iPad and iWatch, Apple continues to search for its next high unit-volume product growth-driver. The iconic iPhone remains Apple's dominant revenue contributor at 63% of annual revenue, with the Mac personal computer brand contributing an additional 11%. While the upcoming iPhone updates will likely spur sales in the short term, we view Apple's long-term growth and performance as dependent on new product development, an area where Apple has met with only moderate success since the iPhone introduction 10 years ago. 

Our rating also reflects Apple's capital policy, which has been heavily focused on debt-funded share repurchases to compensate for the buildup of large overseas cash balances. These balances totaled $246 billion at the end of June and are subject to high taxes if repatriated back to the U.S.

Since 2012, Apple's debt has increased from zero to $108 billion and now represents 1.5 times earnings before interest to taxes, depreciation, and amortization. As long as U.S. interest rates remain low, we expect Apple to maintain a high payout of cash flow and to fund repurchases with low-cost debt rather than incur repatriation taxes. We believe this will drive additional debt issuance in the years ahead.

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