Will Apple Double Its Dividend?

 
on February 22 2013 11:11 AM
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A conversation with Apple (NASDAQ:AAPL) chief financial officer Peter Oppenheimer has led Morgan Stanley analyst Katy Huberty to predict that the company is likely to more than double its dividend this year.

The capital allocation practices of Apple, which currently pays out 2.3 percent in dividend, have been on the radar lately through the actions of hedge fund Greenlight Capital. The fund filed a court case against the company in an effort to stop it from start putting limitations on issuing preferred stock options to investors. The fund’s chairman, David Einhorn, has been outspoken about Apple needing to transfer more of its $137 billion in cash holdings down to shareholders.

According to Huberty, Apple is ready to take action. “Our analysis suggests Apple can match the S&P IT sector’s average [free cash flow] payout of 68 percent if it returns $28 billion in [fiscal year 2013], implying a 6 percent total yield,” she wrote in a note to clients on Friday, according to AppleInsider.

The analyst added that while limited cash flexibility had stopped Apple from rising payouts in the past — the company keeps a majority of its cash overseas — it could instead raise low-interest debt to solve that problem.

Huberty also added in her note that Apple was likely to release a lower-priced iPhone to maintain growth in the coming quarters. High demand for the iPhone 4, which is the cheapest smartphone in Apple’s lineup at the moment, in the December quarter was surprising, but it also indicated the need for a low-cost handset from the company.

With a gross margin of 40 percent and a one-third cannibalization rate, the “iPhone mini” would drive incremental revenue and gross profit, Huberty wrote.

The analyst, who has an Overweight rating and a price target of $630 on the stock, said innovation remained a top priority at Apple.

“The company’s approach to product decisions and innovation has not changed in the past several years despite the CEO transition,” Huberty wrote, signaling at Tim Cook’s takeover from late co-founder Steve Jobs in 2011. “Making great products remains Apple’s core strategy and the company is as confident as ever about the future pipeline of new products and services.”

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