Apple Inc. (AAPL) shares are on the rebound, up 9.4% in the last month. That’s twice as good as rivals Alphabet Inc (GOOG, GOOGL) and Amazon.com, Inc. (AMZN), and double the returns of the S&P 500 Index as well.
But for those gains to continue — I predicted AAPL stock would rally to upward of $120/share in the wake of the new iPhone 5 SE release — the company cannot merely rest on its laurels.
A major factor in determining Apple stock’s near-term performance will be its fiscal second-quarter earnings, which come out on April 25.
Not only will Apple reveal its sales and earnings for the quarter, it’ll also make changes to its capital allocation program. And those changes, says one RBC analyst, could be major bullish catalysts for AAPL stock going forward.
15% Dividend Hike, $50 Billion AAPL Buyback?
Amit Daryanani of RBC Capital thinks Apple can easily raise its dividend payment by between 10% and 15%. On the higher end of that scale, that makes for an implied dividend yield of 2.3%.
With 10-year U.S. Treasuries trading around 1.9% currently, that would make AAPL stock a materially better income investment for retirees and conservative dividend investors.
Of course, that’s not the only way to return capital to shareholders.
Daryanani also thinks Apple could raise its stock buyback plan substantially. While there’s $30 billion remaining on the existing plan, Daryanani sees the tech giant boosting its Apple stock buyback by another $40 billion to $50 billion.
For reference, last year Apple bought back $35 billion of its own stock.
With over $200 billion in the bank, says Daryanani, AAPL could easily commit to returning 100% of its free cash flow (expected to be around $65 billion this quarter) in perpetuity. That would have profoundly positive effects on Apple stock, which would already see a 4%-plus increase in FY2016 EPS from the new buyback alone, says Daryanani.
RBC’s note was probably cheered by activist investor/corporate raider/billionaire boss Carl Icahn, who owns billions in Apple equity and has long pestered CEO Tim Cook to return cash to investors through buybacks and dividends.
Not long ago, InvestorPlace Contributor Wayne Duggan made the point that Apple could feasibly double its dividend, considering its payout ratio — or the percentage of its earnings paid out in the form of a dividend — was a mere 21%.
It’s a nice thought, but probably unlikely, as companies tend to be rather conservative with their dividend hikes. Reason being, if Apple were too aggressive with raising dividends, then fell into some trouble and had to cut it, Wall Street would have a conniption.
I’m not sure to what extent Apple will increase its capital return program come April 19, but I agree with RBC’s Daryanani that it will happen, and it’ll be meaningful.
Daryanani gives AAPL stock a $130 price target, and depending on the sell-through of Apple’s newest iPhone and iPad, that might not be a stretch.
As of this writing, John Divine was long AMZN. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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