Apple (AAPL +1.18%) sits on a famously large and ever- growing cash pile, currently worth about $140 billion. Is that too much of a good thing?
Two world-class investors argue as much at the moment. Legg Mason's Bill Miller argues that Apple should deploy its cash reserves in a more effective way to unlock value in the stock. Take the cost of equity, ranging from 6% to 8% depending on your level of market bullishness, and "multiply it times $130 billion, and that's how much they're destroying value every year with dumb capital allocation," he says. "They could double the dividend tomorrow and still have a big share buyback and never touch the cash."
The payoff from a better fiscal strategy? "Apple would be up 50 percent on just sensible capital allocation."
Greenlight Capital's David Einhorn takes a different tack on the problem but arrives at a similar conclusion. He has proposed that Apple should sell preferred stock with a guaranteed 4% dividend yield, the better to distribute cash to investors, but Apple turned the idea down. "If Apple used about half of their earnings toward this program, we think they would be able to issue approximately $500 billion which would unlock about $320 a share," he said.
A sudden $320 boost would amount to a 70% overnight return for shareholders. It's an intriguing idea.
Miller held up a basket of Dow Jones Industrial Average (^DJI +1.24%) components as role models. Specifically, Apple should loosen its grip on the dividend and buyback purse strings to become more like Coca-Cola, McDonald's, and IBM.
Here's how that would shake out:
| Company |
Dividend and Buybacks as a Ratio of Free Cash Flows |
Dividend Yield |
|---|---|---|
|
Coca-Cola |
98% |
2.7% |
|
McDonald's |
32% |
3.2% |
|
IBM |
93% |
1.7% |
|
Apple today |
13% |
2.3% |
|
Apple with Dow-style policies |
74% |
8.2% |
Source: S&P Capital IQ
All three of Miller's proposed role models sport generous share-buyback programs on top of their dividend payouts. It's clear that Apple could become a tremendous income-generating stock by following the lead of some of the market's most mature and efficient businesses.
Don't expect Cupertino to suddenly open up the cash floodgates anytime soon, but do keep in mind that Apple may have to go down this road if the iPhone and iPad growth spurt runs out of steam.
