Sunday evening, we all got the news we have been waiting for months to hear. Apple (AAPL) will announce Monday morning, at a 9am conference call, what they plan to do with the presumably more than $100 billion of cash and investments they have on their balance sheet.
Before my prediction, a few things to remember. First, about two-thirds of Apple's cash is held outside of the United States, meaning that Apple's cash and investments pile in the US is somewhere between $30 and $40 billion. If Apple wants to bring foreign money back into the US, they will have to pay taxes on it first, and that could have an impact on their decision.
The second issue relates to the following quote, which was in the above linked article.
Brian Marshall, an analyst at ISI, says Apple could initiate a 2.5% dividend payout.
"At today's prices, this would equate to a dividend payout of about $14.65 per share annually," he says. "We believe a dividend will drive an incremental $4.5 billion in stock purchases (i.e., similar to adding a new top 10 holder) from top 20 dividend mutual funds and ETFs."
$4.5 billion in stock purchases? That's less than $5 a share, less than 1% of Apple's $546 billion market cap right now. Don't forget, Apple shares are up 44.6% this year, so some of tomorrow's announcement may be priced in. That could lead to disappointment (the old buy the rumor, sell the news scenario).
So what will Apple do? In my opinion, I'm hoping for something small. If Apple starts out with a huge dividend, the promise for dividend raises going forward will be lessened. I would prefer a smaller dividend to start, so that Apple could raise it going forward. My prediction would be a $2.5 per quarter dividend, and that $10 annually would currently yield 1.71%. That would represent a payout of approximately $9.3 billion, based on Apple's shares outstanding at the end of the most recent quarter.
Just look at what Microsoft (MSFT) has done with their dividend. They started small, at 8 cents per quarter, and now they are increasing it at a nice pace each year. Microsoft has increased its dividend from 13 to 16 to 20 cents since 2010, and there is the potential for another nice raise this year. Remember, Microsoft has about $60 billion in cash and investments on its balance sheet. A lot of people seem to forget that just because Apple is at $100 billion.
As for a potential buyback, I don't see one coming unless they tap the foreign cash hoard. Apple has a fair amount of money inside the US, but I don't think it is enough for a sizable dividend and a buyback at this point. If Apple is going to start buying back its shares, it will need to bring some of its foreign money back in.
One other thing I want to mention here. If you read my latest article on Apple, you'll know that I said that Qualcomm (QCOM) was my best play on Apple, without buying Apple. This weekend, Qualcomm was named positively in Barron's. According to the report, Qualcomm's chips are in both the latest iPhone (4S) and the new iPad. I would also expect them to be in the new iPhone (5?) when it comes out later this year. Also, the following quote from Barron's, if true, would be excellent news for Qualcomm going forward.
Chipsets for video and graphics could drive Microsoft's Windows 8 tablets when those Microsoft products reach the market, the investors' weekly said.
If Qualcomm gets into the Windows 8 tablets, and continues to supply Apple, they will be in great shape. That's why Barron's says Qualcomm can rise 30% in the next year, and this is a stock already at a 52-week high. A 30% rise from here puts the stock at $85.
So Monday is the day for Apple, and I'm expecting a $2.50 quarterly dividend. But actually, I'm hoping that whatever Apple does disappoints investors, for now. Why? Because I would love to see shares drop to $550 or so Monday. It would be a tremendous buying opportunity.
Of course, if investors like what they hear from Apple, I don't see any reason why the stock won't close over $600 Monday. But it is safe to say, if we get that drop Monday, I will be buying Apple.