Apple Inc. (AAPL) iBonds: Why You Should Consider Staying Away

0% real return

Let’s be clear: I’m not predicting higher interest rates, gold-bug like hyperinflation, or Apple’s demise.

Interest rates may stay low.

Inflation could remain tame.

Apple Inc.  (NASDAQ:AAPL) will probably be just fine.

The problem is investors aren’t being compensated for these risks. When your nominal yield is 2%, there isn’t much room for error. Real returns are zilch after you factor in taxes and inflation.

Given that any of the above variables could suddenly change, ‘safe’ Apple bonds start to look incredibly risky.

Better alternatives

In contrast to expensive bonds, the equity portion of Apple Inc.  (NASDAQ:AAPL)’s business is incredibly cheap.

Backing out the cash on the company’s balance sheet, the market is valuing Apple’s entire business at less than seven times earnings while the company generates a 10% annual free cash flow yield.

Need income? Yield starved savers also receive a juicy 3% dividend yield, higher than the rate on the corporate bonds. In addition, equity investors are also better protected against inflation.

Right now the market is pricing Apple as a slow growth tech stock with declining margins. That scenario may very well play out. Or perhaps Apple Inc.  (NASDAQ:AAPL) reinvents another industry with the iTV or the iWatch.

Equity investors get to participate in the upside. Bond holders don’t.

The article 4 Reasons to Avoid Apple iBonds originally appeared on Fool.com and is written by Robert Baillieul.

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