Apple Should Pay A Dividend And Split Its Stock

| About: Apple Inc. (AAPL)

I had thought writing about a stock split would not matter, nor did I think so many were against them until I had heard it argued about by so many, and even disputed by Jim Cramer. There are many people who argue that splitting stock is meaningless. However, this is not true. While it is true splitting a stock does not add, nor take away any value from a specific security, it does have a psychological effect on investors. For example, if Apple (NASDAQ:AAPL) were currently trading for $500, and split 2-1, one would still have the same amount of money invested in Apple.

1 Share x $500 = $500

2 Shares x $250 = $500

Now consider the Average Joe out there, hearing about Apple in the news, reading about Apple in all the headlines. He's thinking he needs to get in on some of the action, this colossal stock that has people arguing whether its a growth stock or a value stock, while blowing out quarter after quarter. He gets on the computer, types in "AAPL" into his search, and then his jaw drops to the ground. A $500+ share price is a hefty sum to own one share of a company. Sure, it has a low PE, is the best of the best in the industry, and is simply a man amongst boys in this market. But if Apple wants to find a way to get even more investors into its stock, they should perform a stock split.

Think if they were to do a 5-1 split, making each share worth approximately $100. That is much more reasonable for many people to chase the stock. Also, in many cases, stock prices usually get driven up higher and higher after the split while they are still a hot buy, and everyone in the world seems to be wanting a piece of the Apple pie. In my mind, a 5-1 split would be reasonable, it would appear to be cheap enough to small retail investors wanting to get into the stock, but expensive enough where they do not appear on the "lower end" of the market. Sure, everyone says Apple is cheap on an earnings basis, or on a price-to-book basis, and a split would not change any of that, but it looks cheaper, and that is what will help drive the stock price even higher, even if the value has not changed at all.

It's a pretty known fact these days, Apple has a ton of cash. Enough cash that the ideas are almost humorous to toss around. Should the company pay a dividend? Should it acquire a telecom? Should it acquire seemingly every company out there? My thoughts are this, Apple is the best in the business, for now. Many high flying tech companies zoom onto The Street, get dubbed "Wall Street's Darling," only to plummet back to earth, almost as fast as they went up. I am not saying Apple will follow this monotonous path, but I believe one day it will come down.

I think almost any acquisition would be irresponsible of Apple. The company sits on enough cash where almost any company could be a potential takeover. I have heard Sirius XM (NASDAQ:SIRI), Sprint (NYSE:S), and even Netflix (NASDAQ:NFLX) all thrown around as possible acquisitions. I just do not see any of these companies being helpful to Apple right now. Sirius would not be enough of an asset to get Apple into any field or industry that they could not do on their own.

As for Sprint, there are many obvious reasons why Apple should not touch this company, the first being that it loses money every quarter and is littered with debt. Apple would have to compete with Verizon (NYSE:VZ), and AT&T (NYSE:T), who are without question the two big players in their given industry. Also, Apple makes much more money subsidizing its phones out to these companies, than they would actually handling the services themselves. These telecom companies buy Apple's phones for a loss, and only make back their money through the payment of the customer's wireless service.

I will admit, I have not heard a lot of chatter about the first two acquisitions as I have about the third, Netflix. One of the many things you could always recall about the late Steve Jobs was that he wanted nothing to do with a content streaming business. Netflix has been pummelled over the last year, no longer makes a profit as it eyes global expansion, and is facing increased competition and content cost. The content providers, such as Starz, HBO, Lionsgate, etc. know that Netflix and other content streaming businesses have to cough up some serious coin if they want to stay in business. With only mediocre selections, most subscribers will cancel within a few months unless quality content is continuously added.

Apple is a juggernaut and does not need acquisitions to get it into the any one of these industries. The one speculative acquisition that I cannot seem to shake from my mind is Twitter. Twitter is valued at around $8-10 billion. It would cost Apple roughly 10% of its cash hoard to acquire Twitter, but it is the most obtainable way into social media. It is obvious that Apple will not take over Facebook (NASDAQ:FB), and they do not have their own form of social media.

I think this would be a great way to break Apple into the space. Some social media ventures come and go, but with Twitter showing that it can retain both users and their time, I think it could be a valuable takeover for Apple. Think about it, Twitter just had its 500 millionth user register last week. It also operates overseas and has everyone from businesses, celebrities, and the broad public involved. It would be a great way to generate traffic and reach a large audience all at once while breaking into the social media space with one of the biggest players besides Facebook.

While I think the Twitter acquisition is doubtful, as with any other acquisition, I think the smartest thing Apple could do is shell out a dividend. Many people had anticipated a divided at last week's annual shareholder meeting, but judging by the response in price action, were not too upset at the news of not receiving one. Approximately 77% of Apple's shares are held by mutual funds, hedge funds, and other institutions. However, by offering no dividend, Apple fails to attract yield and value-chasing funds. If Apple could gain a higher percentage of its float to be institutionally held, it would make the stock less volatile, and more appealing to buy and hold investors. Offering a dividend will shrink the amount of float available to the public, consequently driving up the price as there will be a surplus of demand, with a diminished supply of shares. Even a modest 2% yield from Apple would allow it to keep a large stockpile of cash for acquisitions or other business motives, while attracting many more buyers into the mix. Also, such a yield would be small enough to increase over time, and would not break the bank, either now or in the future.

Eventually Apple is going to slow down, its earnings won't blow out every quarter, and it will fail to continuously revolutionize the world's newest technology. It is then that Apple, and its shareholders will appreciate the stability of value, dividend-holding investors. We have all seen the likes of certain momentum stocks hit their peak, and it is an ugly, ungraceful fall back to earth. Apple can only sit on its pile of cash for so long before shareholders begin to get disgruntled or the company does something extremely stupid with it. I think Apple should initiate a dividend before any of these possible outcomes become a reality.

Disclosure: I am long S.