How Apple's Debt Will Save Tons of Money

Apple (NASDAQ: AAPL  ) changed everything last week when it officially announced it would be raising debt for the first time ever. The move gives the Mac maker financial flexibility by raising domestic cash and allowing it to keep foreign cash "indefinitely reinvested" abroad. Much of that domestic cash will be used to fund Apple's new capital return program, which is expected to total $100 billion through 2015.

Apple's new capital structure is brilliant. Here's why.

Hundreds of millions of dollars saved are hundreds of millions of dollars earned
The company's weighted average cost of debt is 1.85%, which helps reduce its weighted average cost of capital. Beyond those gains, which are mostly implicit, Apple stands to see some very real explicit cost savings from the move. Part of Apple's capital return program entailed boosting its quarterly dividend by 15% to $3.05 per share. That translates into $12.20 per share in annual dividend costs.

Apple currently trades around $440. Using debt that costs 1.85% to repurchase shares effectively means that Apple is paying $8.14 per share in interest to buy back those shares. However, retiring those shares frees the company from that $12.20 per share in annual dividend cost. It's like Apple is paying $8 to save $12 -- a good deal any way you slice it.

It gets better. Interest expense is tax deductible, while dividend payments are not. Apple's statutory federal income tax rate is 35% (like all American companies), so it's after-tax interest expense in the example above really comes out to $5.29 per share. That means its total after-tax savings increases to $6.91 per share annually for every share it buys back with borrowed funds.

Apple hasn't detailed the rate at which it will be repurchasing shares, but CFO Peter Oppenheimer did confirm the company would start this month. The Mac maker has 32 months to spend the remaining $58 billion authorization on repurchasing shares. If Apple were to purchase at a constant rate over that time frame, that's $14.5 billion in shares to be bought back this year. That could buy nearly 33 million shares at current prices -- representing almost $230 million in after-tax savings this year alone.

Realistically, Apple will likely buy more while shares remain weak instead of at a constant rate, and the share price will inevitably fluctuate throughout the rest of 2013. The after-tax savings Apple actually realizes will be different, but the point is we're still talking about very real savings in absolute dollars that Apple investors can look forward to, even if Apple starts to pay out interest expense before its income statement reaches the bottom line.

Given that Apple's about to start saving hundreds of millions of dollars annually, is Apple a buy? The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.