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Will Apple Double Dividend?

 February 08, 2013 02:27 PM

(By Mani) Given ongoing investor desire for Apple, Inc. to change its capital allocation policy, the company could double their dividend to a 4 percent plus yield – or more - and start returning additional excess capital to shareholders.

Cupertino, California-based Apple currently pays $10.6 a share dividend for the full year, representing a yield of 2.2 percent. This compare with 4.3 percent for Intel Corporation (NASDAQ: INTC), 3.4 percent for Microsoft Corporation (NASDAQ: MSFT) and 2.7 percent for Cisco Systems (NASDAQ: CSCO).

[Related -What does Istanbul have to do with AAPL?]

In addition, Apple pays only 18 percent of its earnings as dividends, hence there is ample room for upside.

Shareholder uproar over unlocking value has intensified after hedge fund activist David Einhorn criticized Apple's capital allocation policy that proposed an elimination of the issuance of preferred stock. Einhorn's Greenlight Capital distributed a letter urging shareholders to vote against the proposal.

Subsequently, Apple issued a statement saying that shareholders would still have the right to approve preferred stock even if the proposal is adopted.

Apple is holding its annual shareholder meeting on Feb. 27 where changes to capital allocation policy could be made to unlock additional value from the company's large cash position of $137 billion, or $145 a share.

[Related -Apple Inc. (AAPL): June Quarter Revenue Under Microscope After Weak March Guidiance]

"In our view, an increase to a 4%+ dividend could get the stock moving upwards in the near-term as the company has ample cash to fund the dividend ($43B domestic cash)," RBC Capital Markets analyst Amit Daryanani wrote in a note to clients.

Given Apple's history of announcing products and changes to capital allocation policy through company specific events, any change to capital allocation policy would likely occur after the annual shareholder meeting in March.

Last year, Apple announced their $2.65 a share dividend and buyback on March 19th. Currently, Apple plans to return $45 billion to shareholders in the form of share repurchases and dividends over three years. Out of the $45 billion, it returned $10 billion to date.

If Apple doubles the annual dividend to $21.20, this would imply a $20 billion distribution or 15 percent of total current cash balance. It spends about $2.5 billion a quarter ($10 billion a year) for paying dividends.

"Notably, we expect AAPL will generate $45B of FCF in FY13 so the payout would imply ~44% of its FCF," Daryanani noted.

However, with the majority of Apple's cash balance overseas (about 70 percent), a change to capital allocation that triggers repatriation taxes would be a negative. Assuming the entirety of Apple's cash balance is repatriated and taxed at the 35 percent corporate rate, Apple would lose $33 billion in total cash.

Several Wall Street analysts have been pressing Apple to unlock shareholder value as its cash balance is one of the highest among the U.S. technology giants.

Apple, which makes the iPhone and iPad, has been apprehensive about returning cash to shareholders, and instead used it for R&D, acquisitions, new retail store openings and capital expenditures in its supply chain.

Since Tim Cook took the helm, he felt the pressure to initiate shareholder enhancement measures amid a strong feeling that Apple has more cash than its requirements.

"Notably, with $43B in current domestic cash and ~$45B in annual FCF we believe there is room for additional cash to be returned to shareholders," Daryanani added.



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