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 companies in the world, and with good reason: it’s the largest stock (by market capitalization) in the U.S. equity market, and most of its products are ubiquitous. Now, Apple has also become one of the largest bonds issuers in the market, with 24 current bond offerings as of June 2016. These are all large bond issues totaling more than $55 billion.

As a result, investors who are Apple enthusiasts now have a choice: Apple stock or Apple bonds. But which is the better bet?

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, low debt for its size (despite the $55 billion plus in current bond debt), and plenty of cash flow available to cover its interest payments. Even if Apple didn’t sell another iPhone or iPad starting tomorrow, it has sufficient cash on hand to prevent default on these issues.

At the same time, however, Apple bonds trade with very low yield spreads over comparable U.S. Treasuries. While this is a sign of 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 2007-8 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 as safe as the shorter-term issues, but here the question of 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. The difference, in this case, is that Apple doesn’t has a narrow width of product lines than did Sony in its heyday. An investment in Apple's longer-term bonds therefore 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 its falls behind the technology curve in the years ahead.

AAPL Stock Vs. Apple Bonds

This brings us back to the issue of whether Apple stock or Apple bonds are 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%, while a stock investor would be in line for a dividend yield of 2.3%. (Keep in mind, both numbers change every day with price fluctuations.

This means that investors would earn more income by owning the bonds, but the advantage is fairly narrow. What's more, it 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 is not able to participate in the company’s earnings growth, which is expected to come in at about 15% over the next five years. . Finally, it should be noted that AAPL stock is more liquid (i.e., more easily traded) than its bonds.

Together, these factors indicate that while Apple bonds have a modest yield advantage, AAPL stock is 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.

Keep in mind, however, that every investor has their own specific goals and risk tolerance. While Apple stock has more to offer than its bonds, the stock is also much more volatile – meaning that it isn’t appropriate for more conservative investors for whom safety of principal is the priority.

 

Otherwise, the choice is clear: for those who want to participate in this consumer-technology juggernaut, Apple stock is a better option than its bonds.

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 -- a greater than 30 percent loss of value. Investors, particularly those in or nearing retirement, should take this volatility into account when contemplating a stock investment in Apple.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Always consult an investment advisor and tax professional before you invest.

Last updated June 2016