The February 23 Apple shareholders meeting is upon us. Investors have turned into dividend oddsmakers as the stock potentially surges on a dividend announcement or sells off without one. The hope of a dividend has enabled this stock to overcome the typical February selloff. If a dividend announcement happens on Thursday, the stock will continue on its march to $600 as institutional buyers support demand for the next six weeks. So what are the odds of a dividend announcement on Thursday?
It has become clear that CEO Tim Cook is not Steve Jobs. His statements suggest that he is not religious about cash management; he has been engaged in active discussions about how best to utilize the $98 billion. UBS Wealth Management Group issued a report three weeks ago saying that Apple management has been soliciting the opinions of large shareholders on the subject of paying a dividend. After discussions with these large shareholders, UBS's Bob Faulkner speculated that that Apple would declare a dividend at the Feb. 23 annual meeting. Words and actions out of Cook suggest that Apple is close to changing its cash hoarding strategy.
A dividend isn't the only alternative to unlocking shareholder value; a stock buyback or a stock split are also viable. If Tim Cook is soliciting opinions of shareholders, then these other alternatives have surely come up. Part of his role as CEO is to explore all the options. It's increasingly possible that Cook will utilize a dividend, a buyback and a stock split as ways to boost Apple's p/e as it attempts to catch up to the company's historic growth.
Not only is Cook looking out for shareholders, he's also looking out for himself. Cook leads all Silicon Valley executives in the largest cash haul from company stock. The Wall Street Journal is reporting that 200,000 of Cook's shares vest March 23, 75,000 shares vest on March 10th, and another 1,000,000 shares come due in 2016 when half of the amount can be sold at today's prices. The other half can be sold in 2021 as long as Cook remains Apple's CEO.
So let's get back to the odds. This pending decision is not an easy one. Apple culture is Apple culture, and it's difficult to argue with the Steve Jobs way of doing things. Apple management will need plenty of ammunition for its supply chain, strategic acquisitions, content, research and development, retail expansion, and who knows what kind of unforeseen economic volatility that may creep into the next crisis. Cash is king in a downturn and right now Apple is king. There is plenty of room for debate regarding this issue. I know what I would do, but the question is what will Tim Cook and the Apple board do? We have divided the odds into investable scenarios each with an equal probability of occurring:
Scenario 1: The meeting comes and goes without a dividend announcement. When asked about the topic, Apple management simply states that talks are ongoing. In this scenario, we would hope for a dip prior to the iPad 3 event on March 7. The portfolio would best be served by high allocations of cash and minimal volatility of stock.
Scenario 2: A dividend program is announced as the stock skyrockets $25 on the day and rises to $600 in time for April earnings report. The portfolio would best be served with an allocation of weekly call options that surge on the initial announcement, in addition to an allocation of mid-term call options that capture the majority of the run to $600.
Scenario 3: A dividend program is announced, but the initial stock rise is limited due to a "sell the news" reaction from traders. This would allow us to purchase new allocations with the expectation that the ensuing six weeks will experience the benefits of the delayed institutional demand by those who require dividend exposure.
The current portfolio holds a 50% allocation of AAPL stock and a 10% allocation of AAPL July 2012 $460 calls. We plan to hold those postions through the shareholders meeting. We will be initiating an options strangle in which we hold a positions in both calls and puts at different strike prices with the same expiration date. This strategy is designed to profit from volatility either way. The only way it loses is if there is no volatility. We'll be initiating this position tomorrow. Stay tuned.