Apple Inc (AAPL)

[Bootz]

Apple's cash plan: 3 options

By Philip Elmer-DeWitt March 19, 2012: 6:16 AM ET

Most likely scenario: ongoing dividend. Less likely: special dividend or stock buyback

In a note to clients issued Sunday night, less than 12 hours before Apple's (AAPL) scheduled conference call, RBC Capital's Mike Abramsky laid out his thoughts about what Tim Cook is likely to do with Apple's excess cash: (I quote)

Ongoing Dividend. In the most widely expected scenario, Apple may offer a $10/share ongoing annual dividend (implies a payout that is a slight premium to peers), which equates to $9.4B or 25% of our F12 FCF [free cash flow] estimate, slightly above other tech leaders (MSFT, IBM, ORCL, INTC, QCOM, CSCO, HPQ) that pay out dividends at 21% of FCF. A $10/share annual dividend equates to 1.7% dividend yield, inline with other tech leaders (1.8%).

Two Other Scenarios:

Special Dividend. We estimate Apple could declare a $60/share special one-time dividend, inline with Microsoft's 2004 special dividend (58% of cash). Following the ex-dividend date, shares are likely to drop by the value of the one-time dividend.

Share Buyback. Assuming Apple deploys the same amount of cash (25% of FCF) instead on share repurchases vs. an ongoing dividend, we estimate Apple could repurchase 16M shares annually.
Impact. An ongoing dividend and/or special dividend or share buyback signals a new phase for Apple, one of less rapid, but still above-peer growth and margins. Distributing some of its large cash balance back to shareholders addresses an overhanging issue which has weighed on valuation (13x FTM P/E (including cash) or 11x FTM cash-adj P/E vs. peers at 17x). Additionally, a dividend will appeal to some shareholders for whom a dividend is a requirement, bringing new buyers into the name.

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