Sep 13, 2011 9:39 AM
Apple: Morgan Stanley Suggests $25B BuyBack, 2.4% Dividend
Posted by Tiernan Ray
Morgan Stanley’s Katy Huberty this morning writes that Apple ( AAPL) should considering buying back shares or initiating a dividend as the best use of its excess cash.
Specifically, she recommends a $25 billion one-time share repurchase, and perhaps 2.5% of its shares per year.
Apple could also institute a modest 2.4% dividend, which would only reduce interest income by a small amount, and cost about $9 billion annually in cash, still leaving plenty of free cash flow left over.
Mind you, Huberty doesn’t seem to think any of that will necessarily happen. In reiterates an Overweight rating on Apple shares, and a $470 price target, she writes that the main catalyst for the stock at the moment will be outperformance of the various product lines. The iPhone and iPad will likely perform better than investors expect, producing as much as $50 per share in earnings in calendar year 2013.
For my part, I also don’t think any new capital allocation is imminent at Apple, as I’ve written in the Tech Trader column in Barron’s magazine in recent weeks.
But Huberty goes through some of her thinking on the matter in considerable detail.
Huberty provides data going back to 1969 to show that high dividend paying technology firms, and firms that repurchase shares, have generally fared better than those that have used cash for other purposes, such as M&A.
Huberty, noting that Apple has $76 billion in cash, or $82 per share, writes that the total is far in excess of the $6 to $8 billion in annual investment the company needs to make.
Huberty bases that investment assessment on Apple’s history of component buying and acquisitions, both of which have been small: “four major component prepayments in the last four fiscal years, with three for $500 million each and one for $1.25 billion” and “small technology acquisitions have averaged $300 million per year in the last four years.” She notes Apple has stepped up spending with the $2.6 billion it is putting into the combined $4.5 billion patent bid for Nortel’s assets, along with Microsoft ( MSFT) and others.
If Apple doesn’t spend, that cash pile will keep growing: “If the company does not return cash to shareholders, we expect its cash balance to grow 58% Y/Y to $94 billion by the end of CY11 and another 45% Y/Y to $136 billion by the end of CY12, mainly driven by the strong growth and profitability in the iPhone business.” Apple will generate $34 billion in free cash this calendar year, she reckons, and $42 billion next year.
The most risky thing could do is to make a large acquisition.
“The average stock performance of tech hardware acquirers suggest investors tend to take a negative view on acquisitions in general. Apple also has a unique culture and a lack of prior experience with large acquisitions, which brings another layer of risk to integration.” |
