To help fund its capital return plan, as most of its cash is located outside of the country, Cisco turned to the debt markets. The resulting debt sale surprisingly, did better than a similar sale by Apple last week.
Low Interest Rates
Cisco priced $7 billion of senior unsecured notes in six series, ranging in annual interest rates from 1.4 percent for the tranche maturing in February 2018 to an annual rate of 2.950 percent for the issue maturing in February 2026.
The cash proceeds from the sale will be used for general corporate purposes, repayment of debt, capital expenditure, as well as its capital return plan. As the company has increased both the buyback and the dividend recently, a significant amount of these funds will most likely find its way back to investors. Considering how low interest rates are at the moment, it is a more prudent move for companies to borrow, than to end up paying a large tax bill after repatriating funds.
With this move Cisco will pay under 3 percent for the entirety of the debt issue, which is before including tax savings. By using these funds to repurchase its shares which have a 4 percent annual dividend, Cisco can achieve significant cash flow savings.
Better Results than Apple
When looking at the way Cisco’s deal stacks up to the similar deal Apple did last week, the company comes out on top in most categories. For example, on the three-year debt, the company beat Apple by 10 basis points, while its five-year issue has a lower rate than Apple despite having a higher principal amount. Going through all the details of sales from both companies, it becomes clear that Cisco received a lower spread against Treasury for a significant number of issues when compared to Apple.
Simply looking at the numbers, it would seem as if the debt investors were giving Cisco a vote of confidence by implying that it is currently in a better financial position than Apple, although there are plenty of investors would probably not agree.