|TheStreet.com, Spring, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
Will this be the quarter Apple (AAPL) goes through a stock split and raises its dividend?
First-quarter earnings season kicks off in a couple of weeks. The comparisons will be tough. The consensus estimate is for a year-over-year decline of 0.7% for the S&P 500. Apple earnings, once an investor darling, are expected to shrink from $12.30 to $10.15, a whopping 8% decline (shares are down roughly 30% over the past year).
At the same time, according to Bloomberg estimates, the 100-plus analysts covering the company expect Apple’s revenue to grow by over 70% over the next three years, all while the stock is trading with a forward P/E below 10X.
Clearly, fundamentals aren’t the key driver of this company’s stock price.
Some, me included, argue that the selloff in Apple shares is overdone. But the real question for investors is what will turn things around for the stock?
In recent interviews and press conferences, Apple CEO Tim Cook has attempted to reassure investors the company will make good use of its large cash stock pile — over $130 billion by the end of 2012.
Is a share buyback program in the works? Will Apple’s dividend be raised? How about a stock split? In my opinion, yes, yes and yes.
Apple is a cash cow. It generates over $25 billion in free cash flow every quarter. The company is a sales machine, selling more iPhones than cars sold by all of the major car manufacturers globally.
Most importantly, the company continues to innovate. But to no avail for the stock price in the past 12 months. What Apple stock needs is a traditional boost from higher dividends and the psychological impact of a stock split. Imagine Apple shares trading at $45 (after a 10-for-1 stock split), and paying a $1.33 dividend per share (a 25% hike from current levels). Oh, and what if the company spent 15% of its cash (about $26 billion) to buy back its shares?
I suspect that members of senior management and the board of directors at Apple are aware of the impact these measures have on share prices. Historically speaking, companies that have steadily increased their dividends and repurchased their shares have outperformed shares of other companies.
Apple has the opportunity, and luxury, of being among the few select companies that could engage in a share buyback and raise its dividend without raising its dividend payout ratio or significantly impacting its cash available for R&D — a rare feat that has traditionally been very rewarding.
The bottom line is that no one knows what actions might be taken in the short term. However, given that Apple’s senior management has lots of Apple shares, these steps are both self-serving and beneficial to all Apple investors.