What Apple Needs in 2012: Value Investors and a Dividend

There's very little I can say about Apple (NAS: AAPL) that hasn't already been said. The company has been growing earnings like gangbusters, yet its stock isn't being respected the way many think it should.

After reading a report by Sanford Bernstein research analyst Toni Sacconaghi, I think we might have a good idea what it could take to make Apple the first trillion-dollar company: a dividend.

Pedaling faster and faster, getting nowhere
To truly appreciate the growth Apple has produced, and to understand how severe the P/E compression recently has been, we could simply look at the numbers.

3-Year Revenue Growth Rate


3-Year Earnings Growth Rate


P/E (ttm)


Forward P/E


PEG Ratio


Sources: Yahoo! Finance, fool.com.

And although savvy investors will be left scratching their heads when they see these figures, nothing may capture the unique situation quite like this graph.


Apple Stock Chart by YCharts

It is a rare, rare case where you can find a company whose valuation multiple has contracted by 40% yet the price has almost doubled. Along the way, the company's iPhone has put Research In Motion's (NAS: RIMM) BlackBerry in danger of losing the business-smartphone market, and its Macs have been taking more and more market share from the likes of Hewlett-Packard (NYS: HPQ) .

Moving forward, Apple is firmly entrenched as a member of the triumvirate leading the technology sector forward -- with Google and Amazon.com (NAS: AMZN) assuming the two other spots.

The problem: institutional value investors
In his note to investors, Sacconaghi explores the role that institutional investors are playing in the depression of Apple's stock. Surveying 725 large-cap U.S. mutual funds, he finds that Apple is 26% overweighed by growth funds. Because there are self-imposed limits to how much of a stock funds can own, that doesn't leave a whole lot of investors to create demand for Apple.

Sacconaghi argues that the answer lies in value funds, which are actually significantly underweighted in Apple's stock. That doesn't necessarily make sense to Sacconaghi, given the company's fortress-like balance sheet.

If value funds were to snap out of their funk and start buying shares, that could provide some serious tailwinds for Apple. And the catalyst: joining the likes of Microsoft (NAS: MSFT) and Intel (NAS: INTC) as tech stalwarts that offer their investors the benefit of a hefty dividend.

The power of a dividend
How hefty of a dividend could Apple offer? Here's Sacconaghi's take: "If Apple were to retain that cash balance but return 50% of free cash flow to investors, it would allow the company to pay a 5% annual dividend and still grow its cash reserves by $20 billion per year. A 5% dividend would represent the single-highest yield among the 25 largest U.S. technology companies."

If we were to play a little hypothetical game here, we could see the effect such a move could have on Apple's price. Right now, investors put Intel and Microsoft's yields at 3.6% and 3.1%, respectively; let's say this means investors are willing to accept a 3.4% dividend yield from a tech behemoth.

Obviously, Apple is a fundamentally different company from Intel or Microsoft,but if we were to assume that Apple's payout would be what Sacconaghi is assuming (about a $19-per-share dividend), and that the market would make the yield come in at 3.4%, then we're looking at a share price of about $560. That's an almost 50% premium to where it currently stands.

Is this a guarantee? Surely not, but a dividend would make sense, and new CEO Tim Cook looks more willing to take that route than Steve Jobs ever did.

Get in before a pop?
Dividend or not, Apple is a solid investment, and I think it deserves a place in any well-diversified portfolio. It represents roughly 7% of my real-life portfolio, and I've had it green-thumbed on my Motley Fool CAPS profile for a while now,too.

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At the time thisarticle was published Fool contributorBrian Stoffelowns shares of Apple, Google, Amazon and Intel. You can follow him on Twitter at@TMFStoffel. The Motley Fool owns shares of Microsoft, Google, Apple, Intel, and Amazon.com and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Google, Intel, Microsoft, Amazon.com, and Apple and creating bull call spread positions in Apple, Microsoft, and Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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