Apple Stock Vs. Apple Bonds: Which Is the Better Buy?

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Apple (AAPL) stock is one of the most analyzed, dissected, and talked-about securities in the world, and with good reason, because the company has the largest stock value, by market capitalization, in the U.S. equity market.

Apple has also become one of the largest bond issuers in the market, with dozens of bond offerings. These large bond issues and other short-term debt offerings have brought Apple's total debt to almost $100 billion as of the end of 2017.

As a result, investors who are also Apple enthusiasts now have a choice to purchase either Apple stock or Apple bonds. But which makes the better investment?

Every investor has their own specific goals and risk tolerance. While Apple stock has more to offer than its bonds, the stock also experiences much more volatility, meaning that it isn’t appropriate for more conservative investors who prioritize the safety of their principal

Otherwise, if you're not bound by a conservative investing strategy, it's likely that investing in Apple stock will bring you a better return than Apple's bonds.

Apple Bonds Are Safe, But…

Looked at on their own merits, these bonds don’t offer a particularly compelling value, but the issues due through 2025 are arguably nearly as safe as any government bonds. Apple has a massive cash hoard and low debt for its size, despite the almost $100 billion in current debt, and plenty of cash flow available to cover its interest payments.

Even if Apple didn’t sell any more iPhones or iPads starting from tomorrow, it has sufficient cash on hand to prevent default on its bond issues.

At the same time, however, Apple bonds trade with very low yield spreads over comparable U.S. Treasuries. While this supports the company’s creditworthiness, it also means that the bonds have a high degree of interest-rate sensitivity. For those who hold the bonds until maturity, this isn’t a problem.

However, those who may need to sell the bonds before they mature are exposed to the possibility that Federal Reserve actions or other factors could pressure the broader bond market at some point in the next ten years. The long-running low-interest-rate environment that followed the 2007 to 2008 financial meltdown will eventually end, rates will rise, and as this develops the yields on these bonds will inevitably fall.

Apple’s longer-term bonds, due in 2043 and 2044, may be as safe as the shorter-term issues, but now the company’s product mix comes into question. Thirty years from now, Apple’s current products will be obsolete, much as the Sony Walkman is today. In this case, though, Apple doesn’t have as narrow a set of product lines as Sony did in its heyday.

Investments in Apple's longer-term bonds requires confidence that the company will continue to innovate and offer products that consumers want. Fortunately, the company has enough cash on hand to make its odds of long-term survival high even if it falls behind the technology curve in the years ahead.

AAPL Stock Vs. Apple Bonds

Regarding the issue of whether Apple stock or Apple bonds make the better buy, an investor who bought Apple’s 10-year note at the end of April would have received a yield to maturity of 3.5 percent, while a stock investor would achieve a dividend yield of 2.3 percent. Both numbers change every day with price fluctuations.

This means that investors would earn more income by owning the bonds, by a fairly narrow margin. This also fails to account for the possibility of future dividend growth in the likely event that Apple boosts its dividend over time.

Further, an investor who owns Apple bonds doesn't participate in the company’s earnings growth, which could be about 15 percent over the next five years. Finally, AAPL stock is more easily traded, because of a more liquid market, than its bonds.

Together, these factors indicate that while Apple bonds have a modest yield advantage, AAPL stock makes the better option for long-term total return potential. Also, the potential for dividend growth and the ability to participate in the company’s earnings growth make the stock a better bet to help investors hedge against inflation.

A Final Cautionary Word

For one of the world's largest companies, Apple stock has a history of volatility. In July 2015, for example, the stock stood at over $132/share. Ten months later it sold for less than $90/share, which was a greater than 30 percent loss in value. Investors, particularly those in or nearing retirement, should consider this volatility when contemplating a stock investment in Apple.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.