Apple (AAPL) stock is one of the most talked-about securities in the world, and with good reason. In August 2020, Apple's stock value topped $2 trillion. It's the most valuable company 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 term debt to about $108 million as of 2021.
As a result, investors who are also Apple enthusiasts can purchase either Apple stock or Apple bonds.
- While Apple stock has more to offer than its bonds, the stock also experiences much more volatility.
- Apple bonds don’t offer a particularly compelling value, but the issues due through 2025 are arguably nearly as safe as any government bonds.
- Apple bonds have a modest yield advantage, but AAPL stock makes the better option for long-term total return potential.
Which Is Better?
Every investor has their own specific goals and risk tolerance. Apple stock has more to offer than its bonds; however, the stock also experiences much more volatility. That means that it isn't a good choice for those who prioritize the safety of their principal.
But what if you're not bound by a conservative investing strategy? Then it's likely that investing in Apple stock will bring you a better return than Apple's bonds.
Apple Bonds Are Safe, but Safety Isn't Everything
On their own merits, these bonds don’t offer a particularly compelling value. But the issues due through 2025 are nearly as safe as any government bonds. Apple has a massive cash hoard and low debt for its size. This is despite the roughly $108 million in current debt. It has plenty of cash flow to cover its interest payments.
Even if Apple didn’t sell any more iPhones or iPads ever again, it has enough cash on hand to prevent default on its bond issues.
At the same time, Apple bonds trade with very low yield spreads over comparable U.S. Treasurys. This supports its creditworthiness. But it also means that the bonds have a high degree of interest-rate sensitivity. For those who hold the bonds until maturity, that isn’t a problem.
For those who may need to sell the bonds before they mature, they are exposed to another possibility: Federal Reserve actions or other factors could pressure the broader bond market at some point in the next 10 years. The long-running, low-interest-rate environment that followed the 2007 to 2008 financial meltdown will eventually end. Rates will rise, and the yields on these bonds will inevitably fall.
Apple’s longer-term bonds, due in 2046 and 2047, may be as safe as the shorter-term issues. But the product mix comes into question. Thirty years from now, Apple’s current products may be obsolete, much as the Sony Walkman is today. In this case, though, Apple doesn’t have as narrow a line of products as Sony did in its heyday.
Investing in Apple's longer-term bonds requires confidence that the company will continue innovating and offering products that consumers want. Fortunately, Apple has enough cash on hand to make its odds of long-term survival high. This is likely true even if it falls behind the technology curve in the years ahead.
AAPL Stock vs. Apple Bonds
Back to the original issue: Does Apple stock or Apple bonds make the better buy? On one hand, an investor who bought Apple’s 10-year note in December 2018 would have received a yield to maturity of 3.9%. A stock investor would have achieved a dividend yield of 1.7%. Both numbers change each day with price fluctuations.
This means that investors would earn more income by owning the bonds, by a decent margin. This comparison also fails to account for the possibility of future dividend growth. It's likely that Apple will boost its dividend over time.
Also, an investor who owns Apple bonds doesn't participate in the company’s earnings growth. This could be about 10% to 15% over the next five years. Finally, AAPL stock is more easily traded than its bonds, due to a more liquid market.
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. Stocks also have the potential for dividend growth and give investors the ability to participate in the company’s earnings growth. Overall, the stock is a better bet to help hedge against inflation.
The Bottom Line
For one of the world's largest companies, Apple stock has a history of volatility. In July 2015, for instance, the stock stood at over $132 per share. Ten months later, it sold for less than $90 per share, showing more than a 30% loss in value.
Investors should consider this volatility when thinking about making a stock investment in Apple. This is even more true for those in or nearing retirement.
The Balance does not provide tax, investment, or financial services or 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.