Could Apple Triple Its Dividend Yield?


With a possible dividend hike as the most likely imminent catalyst for Apple shares, that's where investors have been focusing their attention. While product launches have historically been a driving factor for Apple, unrest among Apple's shareholder base continues to grow because it simply has too much money.

Just yesterday, hedge fund star David Einhorn hosted a conference call webcast intended for fellow Apple shareholders to further discuss his idea of preferred shares. CFO Peter Oppenheimer is the one that shot down Einhorn's proposal when he first brought it up last year. Interestingly, Oppenheimer didn't even mention the idea to Tim Cook at the time. Earlier this month, Einhorn said that Cook was receptive to his proposal and that Cook wasn't even aware of the previous conversations that Einhorn had with Oppenheimer.

Morgan Stanley analyst Katy Huberty is offering up today's iDividend commentary, following a meeting with Oppenheimer. Based on the meeting, Huberty is now of the belief that Apple will more than double its current dividend. She suggests that Apple could easily match the S&P IT sector's average payout of 68% of free cash flow, which would translate into returning $28 billion to shareholders in fiscal year 2013.

That payout would represent a total yield of approximately 6%, or nearly triple its current yield of just over 2%. That would be an unprecedented move for a company to boost its dividend by so much less than a year after initiating it. But then again, Apple's done a lot of unprecedented things over the past few years, such as accumulating an additional $100 billion in cash on its balance sheet over the past three years alone.

Huberty notes that the amount of cash that sits overseas remains a challenge and limits the company's flexibility to boost its dividend by this magnitude, but adds that Apple can raise low-interest debt to partially mitigate this challenge. This is a notion that's been gaining steam lately, as it could actually lower Apple's weighted average cost of capital since Apple's cost of equity is likely in the neighborhood of 10% and debt is awfully cheap right now.

Despite Apple's pullback, Huberty is keeping her rating at "overweight" and a price target of $630.

There's a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published