Apple (NASDAQ:AAPL) shares have been taking a beating this year. Fear has crept into expectations that the purveyor off all things iRelated isn't going to deliver a blowout holiday quarter when it reports on Wednesday. As a result, Apple has underperformed the Nasdaq Composite Index by more than 9% year to date. One school of thought suggests a dividend hike is just what Apple shares need to find some relief.
Bernstein Research recently analyzed 800 mutual funds to support the notion that growth funds are reducing Apple's exposure and value funds have yet to make a full commitment. In December of 2011, 82% of growth funds owned Apple at an average of 1.3 times its weight in the Russell 1000 Growth Index. Fast-forward a year later and only 77% of the same growth funds hold Apple, but hold it at 0.9 times the weight of the index. On the value side, only 29% of funds held Apple shares in December of 2011, with an average weight of 0.4 times its weight in the S&P 500. Although this number increased in 2012 to 40%, the average weight among funds remained unchanged. A dividend raise would naturally increase Apple's appeal for value and income funds.
$250 billion reasons
Bernstein estimates Apple's cash balance is going to explode from $121 billion today to $250 billion in three years' time. The firm makes the case that Apple could double its dividend rate or authorize a large-scale buyback (10% of float) and would only spend an additional $50 billion over a five-year period. Obviously, the cash needed to fund a dividend hike isn't the issue. It's a matter if it's the right use of capital, especially since Apple has only paid out two dividends since approving this recent measure. Consequentially, investors may become disenchanted that Apple authorized an additional dividend hike, a telltale sign the company is literally out of ideas on how to put its capital to work.
Easy to overlook
Investors may be overlooking that fact that Apple's cash balance is currently being invested, earning some sort of return, and is compounding over time. Shelby Davis, the investor who turned $50,000 into $900 million dollars over a 50-year period, made his fortunes off of companies in similar situations as Apple. Focusing primarily in insurance, he would identify companies with large cash reserves to act as unrecognized "compounding machines," which the market deeply discounted. Over the long term, the market would slowly recognize this value, earnings would continue to grow, and eventually shares would experience tremendous P/E multiple expansion. Considering its massive cash balance and the fact that Apple currently trades at nearly a 50% discount to the S&P 500, could Apple be a "Davis Double Play" in the making? If this were the case, long-term shareholders would benefit far greater than a dividend double-down.
Fool contributor Steve Heller 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.