From Apple should shrink its finance arm before it goes bananas in the current issue of the Economist:
Apple does not organize its financial activities into one subsidiary, but Schumpeter* has lumped them together. The result—call it “Apple Capital”—has $262 billion of assets, $108 billion of debt, and has traded $1.6 trillion of securities since 2011. It appears to be run fairly cautiously and is part of a thriving firm, but it still deserves scrutiny. Companies have a history of being hurt by their financial arms; think General Electric (GE) or General Motors (GM).
Apple Capital has lots of responsibilities but three stand out. It invests the firm’s mountain of surplus profits, mainly in “highly rated” instruments (this task seems to fall to Braeburn Capital, a subsidiary in Nevada, which uses some external fund managers). Apple Capital also uses derivatives in order to protect the firm against currency and interest-rate gyrations. And it manages America’s fifth-biggest corporate-debt pile by issuing Apple bonds as part of an elaborate strategy to limit tax bills.
Apple Capital has become important to its parent. Since Jobs died, its assets have risen by 221%, twice as fast as the company’s sales, reflecting Apple’s huge build-up of profits. Its investments are worth 32% of Apple’s market value, and its profits (investment income, plus gains on derivatives, less interest costs) have been 7% of Apple’s pre-tax profits so far this year. It is also sizeable compared with other financial firms. Consider four measures: assets, debt, credit exposure and profits. Depending on the yardstick, Apple Capital is 30-85% as big as Goldman Sachs. It is 22-42% as large as GE Capital was at its peak in 2007, just before things went down the tubes during the subprime crisis.
My take: The “bananas” headline is a bit hysterical, given the reporting, but Apple Capital does seem to be making riskier investments. For example, since 2011 Apple’s derivatives book—the face value of its contracts—has risen by 425%, to $124 billion. According to the Economist, this is the third-largest book of any non-financial firm in America, after GE and Ford.
*An unsigned column named for Joseph Schumpeter, Austrian-born economist best known for popularizing the term “creative destruction.”