Apple 2.0

Covering the business that Steve Jobs built

Apple's cash give-back plans: What the analysts are saying

February 8, 2013: 10:34 AM ET

The Street is taking bets on how many billions might be distributed to the shareholders

FORTUNE -- In the wake of the David Einhorn's legal challenge and Apple's (AAPL) statement in response, a flurry of analysts' notes:

Bill Shope, Goldman Sachs: The capital allocation theme heats up. "While we do not take a view on the basis of the legal proceeding, we believe this latest example of shareholder activism serves to highlight Apple's significant capabilities for increased capital allocation. As of the last quarter, Apple held $137.1 billion in cash and long-term investments (or $145 per share), and is trading at a trailing FCF [free cash flow] yield of over 10%. Even though just under 70% of this cash is offshore, this still leaves room for substantial incremental capital allocation. Furthermore, it is still possible that Apple could also capitalize on its overseas cash position with leverage and other mechanisms. We believe significant moves on the capital allocation front could greatly improve sentiment and valuation for Apple, though we continue to focus on the opportunity for a traditional increase in the share buyback authorization and existing dividend."

Ren Reitzes, Barclays: Apple Statement Seems to Hint at Higher Cash Returns. "We believe that Apple has room to increase its total cash outlay for dividends and buybacks by 30-40% over the next 3 years without having to access overseas cash.  We note that Apple had about $137 billion of total cash and investments including $43 billion of domestic cash and $94 billion of overseas cash.  Based on these balances and our future cash flow estimates, we believe Apple could increase the size of its current 3-yr $45 billion capital return program ($10 billion completed by next week) by 30-40% – without needing to access cash overseas and incurring a tax liability.  We are currently forecasting free cash flow of $44.29 billion in 2013 ($46.89 per share) and $51.07 billion in FY14 ($54.35 per share)."

Scott Craig, Merrill Lynch: Apple's more open stance on capital deployment is positive. "We believe only a slight increase in dividend and/or buyback amount won't likely be enough to reignite investor interest in the stock, and with $137bn cash balance ($43bn onshore) and healthy FCF ($100bn+ through C2014), we believe Apple can easily increase the dividend yield to 4% (~$8bn additional cash annually) and, at the same time, be more aggressive in buyback (i.e. additional ~$10-20bn buyback) beyond its prior goal of offsetting dilution. We estimate that each ~$10bn buyback at $450-500 drives 1% EPS accretion. With no debt on its balance sheet today, Apple could also take on debt to accommodate a more aggressive capital deployment strategy without incurring tax penalty to repatriate offshore cash, in our view."

Kulbinder Garcha, Credit Suisse: Cash distributions back in focus. "Based on our detailed analysis which takes in to account the different FCF dynamics onshore and offshore, we see Apple's current distribution plans of $45bn over three years significantly understating their ability to return cash to shareholders. Our group FCF estimates stand at $53bn and $60bn over CY13/14, and we expect the company to generate onshore FCF of ~$60bn through 2015. This, coupled, the existing onshore cash balance of $43bn, provides scope for at least an additional $20bn in distribution while retaining $33bn onshore. We note that our analysis completely discounts the offshore cash balance of $94bn as of 4Q12."

Amit Daryanani, RBC: Change to Cash Usage: "Given Apple's history of announcing products and changes to capital allocation policy through Company specific events, we believe any change to capital allocation policy would likely occur in the March time frame after the annual shareholder meeting. AAPL last year announced their dividend and buyback on March 19th. ... In our view, an increase to a 4%+ dividend could get the stock moving upwards in the near-term as the Company has ample cash to fund the dividend ($43B domestic cash). If the Company were to double the annual dividend to $21.20, this would imply a ~$20B distribution or 15% of total current cash balance. Notably, we expect AAPL will generate $45B of FCF in FY13 so the payout would imply ~44% of its FCF. ... With the majority of Apple's cash balance overseas (~70%), a change to capital allocation that triggers repatriation taxes would be a negative in our view. Assuming the entirety of Apple's cash balance is repatriated and taxed at the 35% corporate rate, Apple would lose $33B in total cash. Notably, with $43B in current domestic cash and ~$45B in annual FCF we believe there is room for additional cash to be returned to shareholders."

Brian Colello, Morningstar: Our Take on Apple's Capital Allocation. "Apple's onshore cash, which can be used for dividends, buybacks, and domestic acquisitions, stands at $43 billion, or $46 per share. This balance, plus future U.S.-generated cash flows, should be more than sufficient to fund Apple's current 2% yield and $10 billion stock-repurchase program. We project that the company will not expand its buyback in future years, other than to perhaps offset equity dilution similar to its current $10 billion plan. Rather , we project decent dividend increases to $3.90 per share per quarter by 2017. Thanks to these distributions, as well as onshore capital spending, we currently project that a substantial majority of Apple's cash balance will be in overseas accounts by 2017, as the firm distributes U.S. cash to investors while overseas cash piles up. We believe the board could alleviate this longer-term issue by issuing debt (presumably at low interest rates) that would be collateralized with offshore cash but would boost Apple's U.S. cash balance."

See also: How would Steve Jobs return cash to his shareholders? 

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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