How Apple Inc. (AAPL) Stock Should Shell Out Its Cash

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Apple stock - How Apple Inc. (AAPL) Stock Should Shell Out Its Cash

Source: Yuanbin Du Via Flickr

Of all the news to come out the victory of President-Elect Donald J. Trump, none will be greeted more warmly than a possible tax law change for Apple Inc. (NASDAQ:AAPL). That’s because the much-vaunted cash hoard that most praise when speaking about the tech giant might finally be dumped (at least in part) on Apple stock holders.

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Corporate taxation rates in the U.S. remain at 35%, the highest in the world. As a result, many corporations that have earned money overseas leave their profits overseas, as well. Thus, those profits do not get taxed at U.S. rates.

In the case of Apple stock, that cash hoard has now reached $216 billion. Think about the sheer size of that cash pile, and what could be done with it — because right now, that cash pile is essentially worthless to AAPL.

Well, maybe not worthless. Maybe not even close to that. But it does hamstring Apple from being as efficient with its capital deployment as it could.

Apple Stock and the Wonders of Cash

I’ve postulated that if the tax code isn’t changed, Apple would start making large acquisitions overseas. That way it could add to its top and bottom line, even if the profits would still reside overseas. It would have to make acquisitions anyway, because Tim Cook is not demonstrating that he has any vision for Apple — at least as a company — and is just a game manager.

So, let’s assume there is a repatriation of some kind, either through an exemption or permanent change in the tax code. First, let’s look at where Apple stock would be presently valued.

The prevailing wisdom is that repatriated cash will probably be subject to a 10% to 15% tax rate, which means up to $33 billion would be taxed on AAPL, leaving net proceeds of $183 billion. Add in the $21 billion of cash here in the U.S., and Apple stock has a total of $204 billion, or about $40 per share in cash.

At the current price of $111, Apple stock is thus trading at $71 per share. So the market says the business itself is worth $376 billion. On trailing 12-month net income of $45.6 billion, Apple stock is thus trading at 8.3 times net income.

Normally, we’d look at a company’s earnings growth rate and make a judgment if the stock is fairly valued based on whether it is trading at a reasonable multiple compared to its growth rate. There’s a small problem with that, though.

Apple’s net income fell in fiscal 2016 by about 16%. Analysts project the five-year EPS to increase at 8% annually. However, that’s earnings per share, not net income. And EPS growth is being juiced because of stock buybacks, even if not by much.

As long as Apple continues to be driven by iPhone sales, which account for some two-thirds of revenue, and Tim Cook doesn’t show us what his vision of the company is going forward, I’m not inclined to offer AAPL stock the kind of premium it used to command.

Still, at 8.3 times net income, Apple stock isn’t expensive, either.

I think the repatriation of that money is what tips the scales to a buy for me.

How Apple Should Spend That Cash

Most people think that Apple would increase its stock buyback. I’m not so sure about that. It would continue to buy back shares, but probably do so at a reasonable pace, and certainly not all at once.

I think AAPL would be wise to prudently raise its dividend, as well. Right now, Apple stock only yields 2.1%. Given how much cash it has, how much cash flow it generates, and that it would like to remain competitive with bonds, Apple could increase the dividend into the 4% range without breaking a sweat. That would only require an additional $10 billion per year, and Apple stock suddenly would have the (price) support of the income crowd.

Also, I think it’s clear that Apple needs to make some acquisitions to build itself out. If that seems obvious, I agree. But remember: AAPL is not nearly as acquisition-happy as others in the tech space, such as Facebook Inc (NASDAQ:FB) or Cisco Systems, Inc. (NASDAQ:CSCO). It should purchase companies that are obviously synergistic with its current form, and also branch into new areas that are capable of extending the Apple experience.

Finally, I believe Apple should set up a $10 billion content studio. Yes, Netflix, Inc. (NASDAQ:NFLX) and others are more entrenched. But the dividends of content in this era will be paid for a long time to come.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/how-apple-inc-aapl-stock-cash-iplace/.

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