The Federal Reserve has been tasked by congress to keep the US economy running smoothly. If the economy is too weak, the Federal Reserve can reduce the interest rate to make borrowing easier. As a result, this boosts consumer spending power. Take, for instance, when economic activities reached a significant low at the start of 2020, the stock market dropped rapidly and by reducing the interest rates, stocks and the economy came back stronger.
On the other hand, whenever the economy is too strong or during intense inflation, stock prices might get out of hand. To respond to this, the Federal Reserve might increase the interest rate to reduce inflation and cool things off. Every part of the economy often feels the impact of higher interest rates. Indeed, car loans, mortgages, and business loans become more expensive. This reduces consumer spending power.
With this in mind, it is easy to see how interest rates and stock markets are related. In the stock market, higher interest rates can incentivize investors to put up their assets for sale while making profits. However, this rising interest rate has been a major issue for many big companies, including Apple.
Apple is undoubtedly one of the most influential tech companies across the far reaches of the globe wherein more and more people wanted to have all Apple products to the extent they wanted to know how to book an appointment in an Apple Store. This is an industry giant that boasts an annual revenue, which is significantly larger than any revenue most companies could even dream of. For many, the company serves as one of the greatest investments over the years.
The company’s value is almost $3 trillion and this has resulted in the management having to repurchase its stocks by borrowing money at low-interest rates. However, with the rising interest rate, borrowing money to repurchase these stocks might become more difficult. Investors must be well aware of this fact.
For a long time, Apple has been buying back its stock by using excess cash. Many companies often resort to share repurchases, especially when they generate more cash profits than they need to make an investment back into the business. In recent times, Apple’s revenue keeps rising by about 13% annually. However, due to its buybacks, its earnings per share have risen by 19% every year.
For this reason, it is only natural for a company whose earnings per share is almost 20% to be a remarkable investment. In recent times, the company has depended on its balance sheet to fund a significant part of its buybacks. This has taken the balance sheet from no debt to about $122 billion.
While the company does not appear to be in any sort of financial issue, this huge company has a remarkable $64 billion in securities and cash, which it can sell quickly for cash. Now, the main question is: if Apple has this much in assets, then why is it still borrowing?
This comes with a straightforward answer: In recent times, debt has been quite cheap since the Federal Reserve’s monetary policy made the interest rates very low. This has made it cheaper for many companies, including Apple, to borrow money. The average interest rate on Apple’s debt is about 2.1%.
Since debt still has a way of adding risk to the balance sheet, it shouldn’t be ignored. It should be stressed that with the Russia-Ukraine war, as well as the surging inflation, the monetary policy that once made it cheaper to borrow money is changing its course.
In March, the Federal Reserve increased its interest rate and this is expected to keep happening throughout the year. The higher Federal Funds rate will make it more expensive for Apple to borrow money, thanks to the increase in interest rates. More than $80 billion of Apple’s debt will become due in the next few years. As a result, it is about time the management decided if it is wise to fund the debt at higher interest rates or start paying it down with its cash.