Apple's shares ran up into last week mostly on expectations around the one-year anniversary of a dividend announcement. However, I believe a significant dividend event would be disastrous for Apple (NASDAQ:AAPL) shareholders, because of the message it would send. The message would be that Apple has changed from innovator to mature company, and its valuation and investor expectations about its future would be appropriately adjusted. In fact, I believe that a significant return of capital to shareholders would serve to cement the sub-$500 stock price and validate the deeply discounted PEG ratio that the shares trade at. Other capital measures would be more value added, but in the end, I still believe the company's future value will depend on its forward product innovation.
After bottoming out at $419 in early March, AAPL shares have recovered ground to above $450 in no time. Many have speculated as to why the stock started higher, including yours truly, who wrote Why Apple Rose on Samsung's Big Day. Some said it was due to a perception of superiority to Samsung's (OTC:SSNLF) new Galaxy S IV mobile smartphone and BlackBerry's (NASDAQ:BBRY) new Z10. I indicated my view that an early AM interview that day with famed investment manager Bill Miller of Legg Mason (NYSE:LM) played a role. Within that interview, Miller indicated that he had just completed taking a new stake in Apple.
Running into this past week, rumors abound about the potential for an Apple capital announcement, because of the anniversary of last year's big event. It was March 19, 2012, when Apple announced plans to initiate a dividend and share repurchase program. The company has been paying a $2.65 quarterly dividend or $10.60 per share annually this fiscal year. The company also declared that it would repurchase $10 billion worth of its shares. The program was estimated to put $45 billion of the company's cash to use over the three-year period outlined.
Still, Apple had $16.1 billion in cash and equivalents as of December 2012 and $39.8 billion when including short-term investments. Though the company's net working capital amounted to $25.5 billion (current assets minus current liabilities), so not all of that capital is readily available today. Still, there's an awful lot of cash sitting in a growing war chest.
First of all, I should note that I view Apple's first cash dividend as a horrible mistake. It sent the same message last year that I'm now warning the company would restate today with any increase in its dividend. That message is that Apple has transformed into a mature company, and will thus achieve a slower growth pace moving forward and deserve the valuation of such a company.
I applaud the share repurchase program, but I would have intensified it to reduce shares outstanding in a significant way, instead of just offsetting the dilutive impact of employee stock payment programs. The message this action sends is that Apple believes its stock is too cheap, and that it will rise. If any new capital financing activity is undertaken this year, I would make it an increase to the repurchase program.
However, such an action would be low on my list of value added options, unless it involved the removal and replacement of the dividend with share repurchases. Such a move would show the market that Apple sees a very special value opportunity in its shares. However, a dividend removal would also likely be received poorly by investors at this point, because those are usually perceived as a trouble signal. Apple might do better to keep the dividend in place and raise the repurchase program.
Concluding on this point, if Apple were to make a significant increase to its dividend, payout a special dividend, or return shareholder value through a preferred share offering, I suggest it would send a very dangerous message to the investment community. It would indicate to the market that Apple was no longer the innovator of our age, and was ready to take its place behind cash cow mature companies like General Electric (NYSE:GE) and Microsoft (NASDAQ:MSFT), with all due respect to those immensely successful firms.
The Right Message
Let's not get distracted by the voices of panicked investors reaching in desperation, and instead focus on what would truly add real value. Apple should refrain from sending the wrong message and finally make that new product market segment entry I've been calling for all the way down the stock's slide, the Apple Television. I have a few more ideas as well as to how to enhance value in such an offering, which I will offer in future reports. In introducing any new innovative product in a new market segment, Apple would reaffirm America's faith in its electronic kingdom, and quell the calls of some for Google (NASDAQ:GOOG) to take the throne. America would once again believe that Apple will change the world.
It would likewise reestablish market expectations for the company's future growth. With such action, the deep discount to the company's PEG ratio (0.55X) would close and Apple shareholders would be much more richly rewarded than by any new special dividend payout. In my view, the shares would likely return to their peak of last year on their way to $1000 and higher before the close of this year. In other words, if Apple takes my free consulting advice, some of which it likely already incorporates in its strategic plans, I expect it could create over $400 billion in market capital value for its shareholders in no time. As the days pass, though, investors simply grow wearier and rightfully doubtful about Apple's innovative outlook. Perhaps, then, the problem with Apple is really Apple itself.