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If you look at the interest rates on Apple’s $ 14 billion borrowings at the start of the month, it becomes immediately clear why the company has turned to the debt market to raise money to buy back shares. rather than dipping into its roughly $ 200 billion in cash and marketable securities.
This is because the interest rate on Apple’s new debt is insanely low. Especially on the $ 2.5 billion in five-year notes, which has an after-tax interest cost less to Apple than the after-tax cost of the cash dividend it pays to its common shareholders.
Sounds amazing, doesn’t it? But let me show you the numbers, and you’ll find it’s true.
The interest rate on Apple’s $ 2.5 billion five-year notes is 0.7%. This interest is tax deductible for Apple, so after applying the 21% federal corporate tax rate, Apple’s net interest cost is 0.55%.
Apple’s common stock return, the last time I looked, was around 0.65%. (That’s Apple’s 82-cent annual dividend divided by its recent stock price of about $ 127.) However, the dividend is not tax-deductible for Apple.
So you see, Apple’s after-tax cost of that five-year, $ 2.5 billion borrowing is less than the after-tax cost of dividends that it won’t have to pay on the stocks it is buying back with. that borrowed money.
Since Apple is rapidly increasing its annual cash dividend – it went from 52 cents five years ago to 82 cents – Apple’s savings from buying stocks will likely increase over time.
Now to the money falling from the sky for some old people – that includes me.
Here is the deal. If you are 72 years of age or older and have one or more defined contribution pension plans such as 401 (k) s, 403 (b) s or individual retirement accounts, you are obligated to take “minimum required distributions” each. year. Your RMD is based on your end of year age and the end of year balance in your accounts.
For example, if you were 75 on December 31, and your account balance totaled $ 100,000, you must take at least $ 4,367 in distributions, which are federally taxable, this year.
Now let’s say you want to contribute $ 1,000 to your local pantry. You can make this donation by writing a $ 1,000 pantry check from one of your retirement accounts or by asking your pension plan administrator to issue an eligible charitable distribution check. of $ 1,000 payable to the pantry. This would reduce your required taxable distribution by $ 1,000 – the functional equivalent of getting a federal tax deduction for your contribution.
If, like me and the vast majority of taxpayers these days, you take the standard deduction, it’s money falling from the sky.
Last March, after stocks fell more than 30% from their all-time highs a month earlier, Congress rolled back the RMD requirements for 2020 under the Aid Act, the relief and economic security from the coronavirus, or care law. This meant that you had no tax benefit last year using qualifying charitable distributions to make contributions.
This year, the RMD are back. As is the appeal of using QCDs. In fact, my first financial decision this year was to order 18 QCD checks, mostly from charities that I had told last year that they would receive my 2020 contributions in early 2021 because I couldn’t. deduct them in 2020.
There are all kinds of limitations and complications associated with QCDs, which we will discuss another day. You should also keep track of the amount of QCD you have performed and ensure that you or your tax preparer subtract your QCDs from the retirement income shown on the 1099-R forms you receive from your plan administrators.
Of course, the paperwork and some of the other QCD rules are boring. But when the money falls from the sky, inconvenience is a cheap price to pay to get your buckets filled.
