Apple Inc. (NASDAQ:AAPL) will be reporting earnings for the first quarter in just a few weeks. That’s when the company will also be telling us what it plans to do with some of its $200 billion in cash. There’s a lot of speculation on how that money is going to be spent. I’ve also been refining my thoughts about how Apple stock will use that money.
What’s Not Next for Apple Stock
Let’s start with what Apple will not do the money. Apple will not buy Netflix, Inc. (NASDAQ:NFLX). There is simply no reason for Apple stock management to overpay for a money-losing, though terrific, content operation. Apple stock management hired a couple of exceptional executives, with many years of storytelling experience, and tremendous track records of success, to oversee its own content production. Over time, Apple stock will benefit from its own ability to create content. It has no reason to buy a studio.
That’s exactly the reason why Apple will not by Walt Disney Co (NYSE:DIS), either. There isn’t quite as much synergy between Apple and Disney as one might wish there was, especially in regards to taking advantage of content. Disney is also gigantic and Apple would have to spend all of its cash, as well as drawing down debt, to purchase DIS. This just seems to have no value and makes no sense.
Nor will Apple by Tesla Inc (NASDAQ:TSLA). Apple has no interest in buying a money-losing, cash- burning product that has very little chance of ever turning a profit, considering all the competition coming Tesla’s way. Tesla will never be able to get the car down to a price that makes selling it to regular people feasible.
Likely Moves for Apple Stock
The two most likely moves for Apple will be to increase the dividend as well as engage in stock repurchases. But that’s not all that Apple will do.
Right now Apple stock dividend is 1.43%. That equates to a payout of $2.52 per year. Apple stock is a true growth stock and not considered by most to be an income stock. For AAPL stock to truly breach the barrier of becoming a long-term income stock, it still needs to get its dividend to about 3%.
That would mean increasing the dividend to about $5.15 a share. With 5 billion shares outstanding, that would mean $25 billion in cash per year being returned to shareholders. Given the amount of free cash of Apple that comes out every year just from operations, this would be sustainable.
The issue with share repurchases is that it only makes sense to do this if Apple stock is truly undervalued. Based on its growth rate, it would appear that right now that makes for a compelling argument.
Of course what Apple really needs to do is something that it has always had leeway to do, without needing $200 billion in cash that will now be repatriated.
Bottom Line on Apple Stock
Apple needs to find a vision for the future. Tim Cook is a fine game manager, but Apple stock needs to move beyond the iPhone. It is making strides in that direction with some services, but it really needs to make this a priority.
Apple needs to find a way to organically grow. If that strategy can somehow be integrated with making strategic acquisitions, so much the better. That’s the only reason to be making strategic acquisitions. A company that is acquired by Apple needs to be integrated into some form of organic internal operation that is designed to make Apple grow.
We will see exactly what Apple has in store just a few weeks but I would not expect some big announcement that blows the whole $200 billion.
I think Apple will be prudent and parcel some of the cash out along all of the scenarios suggested. For now, it seems to me that Apple stock is reasonably priced given its growth rate, cash on hand, and free cash flow.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns shares of AAPL and DIS. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
