Next Up For Apple, Dividend And Stock Split

Now that the world has seen that the iPad 3 is just evolutionary and not revolutionary, it is time that Apple's management considers other means to increase shareholder value including returning cash to shareholders through a dividend. A stock split would increase demand for the shares as well. Just to be clear, Apple remains an in-expensive stock, trading at 12x EPS versus a consensus EPS growth rate of 18-20%. But to get the stock to increase materially from this point, Apple's management would need to do more than just sell products, which they will do plenty of, but we believe that growth has already been captured in consensus estimates for the company. Currently, Apple has $98 billion in cash, with $34 billion of that cash domiciled in the U.S. The dividends can only use the $34 billion in the U.S., unless Apple finds a way to tax efficiently repatriate some of the international cash. The issuance of a dividend would increase demand for the stock as income focused institutional investors who currently under-own Apple' shares, buy up shares. Most dividend paying Tech stocks trade at premium valuations to their peers, have outperformed their peers and the market over the past 10 years, and the higher the yield the better the performance. The empirical evidence supports the issuance for a dividend. Apple, we think, off the bat, could pay a 2% dividend yield consistent with most companies in the S&P 500, and progressively increase the yield toward 3%-4%. Consensus has Apple generating more than $50 billion in free cash flow per year over the next few years, with about 40% of that generated in the U.S., and available for a dividend. Management could pay a yield based on 50%-100% payout of that free cash flow. As for a stock split, it should drive up demand for the shares particularly from individual investors who would want to own the stock for the long-term in their investment funds. Apple's product owners are fanatical about the products and would want to participate in the ownership of the company. They view the share price as prohibitive from a psychological perspective and would be willing to participate in ownership at a lower absolute share price.