As we all have seen, Apple (NASDAQ:AAPL) stock has been crushed recently. From an all-time high of $705 on 9/21/12, the stock has fallen precipitously and is now below $500 a share (a 30% decline as of today). Jeff Gundlack, the outspoken founder of DoubleLine Capital, believes the stock will retrace its entire run-up and drop to $425 again. Analysts have done their "channel checks" and concluded that demand for the iPhone (Apple's most profitable product) is not as strong as need be to meet or beat earnings expectations.
I do not believe that any of these analysts have a real idea what is going on in Apple's supply chain. It is so vast and so complex that no one except Apple can be sure what component orders look like. The sell-side analysts are paid to speculate, and that is what they are doing.
I, of course, have no idea what earnings or guidance will be when Apple reports its financial results for the December quarter next week, but there are a number of things the Board of Directors can do to help stabilize the share price and even put a floor on it going forward.
As of September 30, 2012, Apple had cash and cash equivalents of $121B on its balance sheet. Now is the time to start making that cash work for shareholders. Here are a few ways to do just that.
1. Apple should double the dividend payout. In Apple's FY2012, the Company generated $42.5B in free cash flow (cash from operations less capital expenditures). The current dividend will cost the Company approximately $10B a year. Why not double the dividend? At the current stock price, the yield would rise to a very respectable 4%+, making it much more of a value play and opening the stock up to the huge league of stock investors that buy stocks for the dividend income stream. With a $120B backstop and only a 50% payout ratio, the dividend would remain super safe.
2. Apple needs to split the stock 10-for-1. The stock price is too high. Even with a 4% dividend, many retail investors shy away from buying stocks that are $500 per share. Whether it's purely psychological or it's because people cannot afford $500, retail investors will be much more likely to buy Apple stock at $50 per share than at $500 a share. At $50 a share, Apple stock will be on par with all the other blue chip stocks that are primarily held for their dividends. It will go a long way toward putting a floor on the stock price for many years to come. A $50 Apple stock price, trading at 10x EPS and paying a 4%+ dividend will be very attractive to retail investors...much more than a $500 stock paying a 2% dividend.
3. Apple needs to buy back larger amounts of stock when the stock is trading at attractive multiples. Currently, Apple has stated that the Company will only buy back enough stock to offset stock issued for compensation. In FY2012, only $2B of stock would have been repurchased under this new policy. That is less than one-half of one percent of the outstanding stock (based on the current market cap of $460B). It's clear that the $120B in cash on the balance sheet is doing next to nothing for shareholders. If the Company paid all of its current free-cash-flow runrate to shareholders (half in dividends and half in buybacks) Apple could maintain the ridiculous $120B in cash for whatever purposes Apple wants.
What would keep Apple from making these shareholder friendly moves? Well, first a large chunk of that cash is held off-shore for tax purposes and is not likely to be repatriated for payment to shareholders, barring a federal tax holiday. That could put a strain on the amount of cash available to return to shareholders. Still, there are creative ways around such a restriction. Other cash cows such as Microsoft borrow money to use for shareholder payouts. Apple could borrow tens of billions at dirt cheap rates (probably less than the U.S. Government!) to fund shareholder payouts.
Another reason why Apple might not want to make these shareholder friendly moves is because the perception might be that the Company is no longer an innovator and that Apple has played its last hand. That may be true. What is the next great money maker for Apple? An iTV? Maybe the Company does not have one at this point, but so what? Its existing products continue to be best sellers and should be for many years to come. It is true that the hyper growth days of Apple are probably over - the sooner the Company comes to grip with this the better all shareholders will be. Apple enjoys tremendous financial flexibility as a result of its balance sheet. Why not use some of that flexibility to defend the stock?
Longer term, the real worry for Apple is its gross margins, particularly on the iPhone. I do not see EPS growing much above $50/share because of the margin pressure. However, if the Company would start buying back 3-4% of the outstanding stock a year, we could see a solid 10% annual growth in EPS for many years. It is now time to view Apple as a value stock, not a hyper growth stock. If the Board of Directors at Apple adopt these more shareholder friendly moves, it will go a long way toward drawing in those retail investors looking for decent growth and a nice dividend. These investors will significantly lower the volatility of the stock and set the stage for steady (albeit much lower) growth going forward.