Apple Inc. (NASDAQ: AAPL) has been one of our dividend offenders for quite some time, but it is hard to argue that the company’s equity-investor strategy has been wrong. After all, its stock has weathered the storm well and recent years have been incredibly good for the company. A new call is out from Morgan Stanley, and it has some controversy to it with a good scenario and a bad one.
The firm is expecting that Apple is now closer to returning capital to shareholders. The call is for a dividend, but there is also the possibility of a large stock buyback as a means of using some of that $76 billion cash arsenal. This is likely to be close to $100 billion in early 2012.
Morgan Stanley noted a 2.4% dividend rate but it also noted the possibility of a $25 billion share buyback program as a possibility. The report also leaves open the possibility of a large acquisition, but Apple has traditionally been an organic grower.
The take of 24/7 Wall St. is that if Apple wants to handle everything smoothly then it needs to announce a one-time dividend followed by a healthy continued dividend of about 2.5% or even more. This notion of a stock buyback program is a silly one. Why does Apple need to shrink its float? Does Apple need to buy down its P/E ratio? The stock trades at less than 14-times this year’s expected earnings and under 12-times next year’s expected earnings… Does Apple need to manipulate its earnings multiple to under 10?
One-time dividends, steady dividends, and share buybacks have all had mixed results when it comes to technology stocks. Microsoft Corporation (NASDAQ: MSFT) has learned that dividends do not assure ongoing shareholder success after a long period of growth. Cisco Systems Corporation (NASDAQ: CSCO) has already bought back more stock in the last decade than most companies in the S&P 500 have as their full market capitalizations now. That hasn’t helped it, nor has its unimpressive dividend yield.
Apple needs to return capital to shareholders or it needs to make a large deal with its cash. This notion of a buyback would be a serious waste of capital. There is just no point to a buyback, and many investors and pundits (including yours truly) think they are a waste of capital and effort except in extreme circumstances.
JON C. OGG