Bloomberg published an article in early November about RTX Corp. (NYSE:RTX) selling $6 billion in investment-grade bonds over various durations to help repay a short-term loan it got to cover its $10 billion accelerated share repurchase.
Is it just me, or does that seem ridiculous in a higher interest-rate market?
“Both Moody’s Investors Service and S&P Global Ratings reduced the outlook on RTX’s rating to negative from stable due to its debt load following the share-buyback announcement,” stated Bloomberg.
Typically, I’d discuss three stocks other than RTX in this situation. However, the sheer insanity of the move makes me want to examine the defense contractor’s long-term track record for buying back its stock.
As a result, here are two stocks and RTX using debt-fueled buybacks, seemingly undeterred by rising interest rates.
RTX Corp. (RTX)
Let’s dig deep into RTX’s borrowing.
First, the smallest of the five debt tranches was $500 millon at 5.75% maturing in 2029. The largest was $1.75 billion at 6.4% maturing in 2054. Also, it is the most extended duration. A back-of-the-napkin calculation suggests it will pay $365 million in annual interest on these bonds. True, that’s better than the current prime rate (8.5%), which it paid for its bridge loan.
Next, look at the $10 billion accelerated share repurchase (ASR).
In exchange for $10 billion, RTX received 108.45 million shares, an average price of $92.21. That’s about $10 higher than the current share price, although more shares could be delivered as part of the ASR.
Raytheon Technologies merged with United Technologies on Apr. 3, 2020. As of June 30, 2020, it had 1.53 billion shares outstanding. The company changed its name to RTX in July. As of the end of the third quarter (Sept. 30), it had 1.44 billion shares outstanding. Based on the 108.45 million shares repurchased through its ASR, it reduced its share count by 7.5% to $1.33 billion.
For the first nine months of 2023, it repurchased $2.59 billion of its stock at an average price of $88.0 a share. Then in 2022, it repurchased $2.8 billion of its stock at an average price of $93.61. Finally, in 2021, it repurchased $2.33 billion at $83.10 a share. And, it bought back $47 million in 2020 (merger year) for $142.42 a share.
To summarize, it has repurchased $15.44 billion of its stock, including its ASR, for an average price of $92.59 a share. That’s a return on investment of -11%.
And for this wonderful return, RTX gets an 18% increase in its long-term debt. Absolute lunacy.
Apple (AAPL)
Once upon a time, Apple (NASDAQ:AAPL) had zero debt. The iPhone manufacturer finished fiscal 2012 (September year-end) with zero long-term debt and $146.8 billion in cash, short-term, and long-term marketable securities.
Then, in April 2013, the company announced that it would borrow $17 billion to buy back its shares. It plans to buy back up to $60 billion by 2015, up from a previous $10 billion share repurchase program.
In fiscal 2013, it repurchased $23 billion (19.4 million shares) of its stock. And, thanks to two stock splits in June 2014 (7-for-1) and August 2020 (4 for-1), the 19.4 million shares are now 543.2 million, worth $101.3 billion, a compound annual growth rate of 16.0%, much higher than its cost of capital on the $17 billion in loans.
Finally, a decade later, Apple’s net cash position of $146.8 billion in 2012 is now $38.2 billion, 74% lower than in 2012.
The company issued $5.25 billion in bonds in May at interest rates between 4.0% and 4.85% to keep the share repurchases and dividends moving higher. The highest rate is for $1.25 billion in notes maturing in 2053. The annual interest on those bonds is $229 million, or 0.2% of its 2023 operating income of $114.3 billion.
There’s responsible use of debt (AAPL) and irresponsible (RTX).
Bristol-Myers Squibb (BMY)
Bristol-Myers Squibb (NYSE:BMY) issued $4.5 billion of senior unsecured debt on Oct. 30 in four tranches, with interest rates ranging from 5.75% to 6.4%. The latter matures in 2063, 40 years from now.
Let’s look at a comparison. Apple specified the proceeds from its bond offering would be used for share repurchases and dividends. Yet, Bristol-Myers said in its prospectus that it would use them for “general corporate purposes, including, but not limited to, the financing of the proposed acquisition of Mirati and the fees and expenses in connection therewith and with this offering.”
The notes offering increased its long-term debt by 14% to $36.6 billion. Its long-term debt accounts for 55.7% of its total capital. That’s not an overly leveraged capital structure. Apple’s debt-to-capital ratio is approximately 60.9%.
The drug company has ramped up its share repurchases in the past three years, buying back $14.3 billion in 2021 and 2022. It bought $5.2 billion through the first nine months of 2023. That’s an average price of $68.66 a share for the 284 million repurchased over the past 33 months.
Finally, thanks to a 30% decline in its share price in 2023, Bristol-Myers’ ROI on its share repurchases since the beginning of 2022 is -26.3%. Considering its shares have spent little time over $70 in the past five years, the buybacks have not added value for shareholders.
If you own BMY shares, I’d be very disappointed if it doesn’t make large buys in the final quarter of 2023.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
