Morgan Stanley expects 6% dividend, cheaper 'iPhone mini' after meeting with Apple CFO

Posted:
in AAPL Investors edited January 2014
Morgan Stanley analyst Katy Huberty recently met with Apple Chief Financial Officer Peter Oppenheimer, and came away with the impression that Apple will likely increase cash return to shareholders, and potentially release a lower priced iPhone to maintain growth.

Morgan Stanley


Huberty, in a note to investors on Friday, said that innovation remains a "top priority" at Apple. That's why she expects Apple to expand the iPhone lineup, and also to introduce new services that can "unlock significant value" and drive device sales.

She noted that demand for the iPhone 4, Apple's current low-end handset offering, was surprisingly strong during the December quarter. With a gross margin of 40 percent and a one-third cannibalization rate, she believes a so-called "iPhone mini" would drive incremental revenue and gross profit.

"The company's approach to product decisions and innovation has not changed in the past several years despite the CEO transition," Huberty wrote. "Making great products remains Apple's core strategy and the company is as confident as ever about the future pipeline of new products and services."

And with Apple's cash balance $40 billion higher than it was in March of 2012, Huberty believes the company will likely return more cash to shareholders. She believes the iPhone maker could match the S&P 500 IT sector's average free cash flow payout of 68 percent.

At that rate, Apple could return $28 billion to shareholders in fiscal year 2013, which would imply a 6 percent total yield on the company's dividend. That would be a major increase over Apple's current $2.65 quarterly dividend, which carries a 2.3 percent yield.

To pay out that higher dividend, Apple could borrow cash. She noted that the amount of Apple's cash overseas has limited the company's flexibility, but this could be addressed by raising low-interest debt.

Morgan Stanley has maintained its "overweight" rating for AAPL stock with a price target of $630.
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Comments

  • Reply 1 of 73


    Not the sharpest tool in the shed, Katy.

  • Reply 2 of 73
    blackbookblackbook Posts: 1,361member


    Sounds believable enough to me.


     


    I think an iPhone Mini is more likely than the iPhone "Math."

  • Reply 3 of 73


    "Making great products remains Apple's core strategy"


     


    Hmmm ... I wonder if any company has ever stated: "Our core strategy is to stop making great products."

  • Reply 4 of 73
    If Apple really did start borrowing in order to return capital to shareholders that is actually sequestered overseas I'd start worrying about the financial management of the company. Cash in other markets is prone to exchange rate and other risks. While this risk could be managed as there is a lot of cash outside the US it starts to look a little more like banking than the core business.
  • Reply 5 of 73
    borrow cash? apple won't even spend the money they have. I think a 3-4% div is much more likely.
  • Reply 6 of 73
    Borrow cash when they have billions in the bank. Gotta love it.
  • Reply 7 of 73
    gazoobeegazoobee Posts: 3,754member
    The stock market and market analysts will eventually ruin Apple. Only they could turn the world's most successful company into a "problem" that needs to be fixed.

    I'm slowly becoming a firm believer in the theory that being a public company and having shares and shareholders has no benefits beyond the initial raising of capital when a firm first starts out.

    Albatross!
  • Reply 8 of 73
    I remember the advertising tag line for a company in Germany was "Competence in"... their field of expertise. Not excellence or leadership, but just competence. Some people don't set the bar too high for themselves.
  • Reply 9 of 73
    dasanman69dasanman69 Posts: 13,001member
    Yeah and I'm expecting Adriana Lima any minute now.
  • Reply 10 of 73

    Quote:

    Originally Posted by gcguy View Post



    Borrow cash when they have billions in the bank. Gotta love it.


     


    Cheaper to pay the interest to borrow it (2-3%), than to pay the taxes on it (35%).

  • Reply 11 of 73
    mrstepmrstep Posts: 467member

    Quote:

    Originally Posted by Gazoobee View Post



    <snip>


    I'm slowly becoming a firm believer in the theory that being a public company and having shares and shareholders has no benefits beyond the initial raising of capital when a firm first starts out.

     


     


    No doubt. My kids asked me why the smaller car companies got bought by the bigger ones and then generally got messed up and I explained that as a public company, the board generally has to vote 'yes' on being taken over if the takeover price is higher than the current stock price - even if the merger is likely to destroy the company in the mid-to-long term. Hey, vote 'no' and some a-holes set up a class action against you for not taking the money (or in the case of Apple, they sue you for not giving them all of your cash).


     


    In autos, it left Volvo being Chinese-owned, Jaguar first making Fords and then being Indian-owned, Saab dead with parts Chinese-owned, etc. In tech - well, I'm scared to see what happens to Apple longer-term. Lawsuits about management being willing to cannibalize their own products and take risks are surely next, which would turn it into the next Microsoft-like innovator eventually. :/

  • Reply 12 of 73
    rob53rob53 Posts: 2,557member

    Quote:

    Originally Posted by Gazoobee View Post



    The stock market and market analysts will eventually ruin Apple. Only they could turn the world's most successful company into a "problem" that needs to be fixed.



    I'm slowly becoming a firm believer in the theory that being a public company and having shares and shareholders has no benefits beyond the initial raising of capital when a firm first starts out.



    Albatross!


    I agree. My father-in-law is a retired stock broker, practicing back in the days when investors actually invested in companies. At that time, I believe the invested money was actually available and used by the company but that doesn't happen anymore, except at an IPO and especially with a company like Apple that has a ton of cash. I'm trying to remember a time when stock investments actually helped Apple or kept them alive. There might have been a few times but not many and none in the last decade. Apple survives because of its products and in spite of all the manipulation by crazy analysts and investors. The stock market has nothing positive to do with Apple's corporate growth, it's all product acceptance that increases Apple's cash stockpile. All this garbage about about where their stock price will be in a year has nothing to do with how many products it sells. History has taught us that. Apple can have a banner year but some idiot will say it wasn't enough so their stock price goes down. Samsung pumps out tons of garbage, which analysts believe hurts Apple's bottom line, but we all know companies like Samsung that produce throw-away devices will never make any money. Why can't analysts see that? Apple is making money and great products. Analysts need to get out of Apple's way and quit messing around with them. Just get a real job and participate in the re-growth of the US instead of being yet another me-to excuse for an analyst who isn't providing anything valid to this country or world.

  • Reply 13 of 73

    Quote:

    Originally Posted by Squeak View Post


     


    Cheaper to pay the interest to borrow it (2-3%), than to pay the taxes on it (35%).



     


    Yeap and then next year if the Congress decided to close this loophole and the company would've paid both interest and tax for nothing. 

  • Reply 14 of 73

    Quote:

    Originally Posted by gcguy View Post



    Borrow cash when they have billions in the bank. Gotta love it.




    This is not uncommon practice, even though I doubt Apple would do it.

  • Reply 15 of 73
    mrstep wrote: »
    No doubt. My kids asked me why the smaller car companies got bought by the bigger ones and then generally got messed up and I explained that as a public company, the board generally has to vote 'yes' on being taken over if the takeover price is higher than the current stock price - even if the merger is likely to destroy the company in the mid-to-long term. Hey, vote 'no' and some a-holes set up a class action against you for not taking the money (or in the case of Apple, they sue you for not giving them all of your cash).

    In autos, it left Volvo being Chinese-owned, Jaguar first making Fords and then being Indian-owned, Saab dead with parts Chinese-owned, etc. In tech - well, I'm scared to see what happens to Apple longer-term. Lawsuits about management being willing to cannibalize their own products and take risks are surely next, which would turn it into the next Microsoft-like innovator eventually. :/

    This has to be the most naive thing I've read here in a while.

    Its tantamount to: The 'devil made me do it, so it's his fault' or 'the junkie sold me the drugs, so it's his fault.'

    These companies can also grow a pair, and say 'no' to Wall Street. Stop the nonsense of earnings guidance (as companies such as Google, McDonalds, Berkshire Hathaway, GE, etc do). Do a massive share repurchase with a stock split (the latter for purely psychological reasons). And tell the analysts to take a hike.
  • Reply 16 of 73

    Quote:

    Originally Posted by drobforever View Post


     


    Yeap and then next year if the Congress decided to close this loophole and the company would've paid both interest and tax for nothing. 



    the interest...maybe... but you're not taxed on something you didn't do.


     


    This is the key thread... Apple's a US company, but a lot of it's liquid assets (and profit growth) is overseas.   Congress may close this loophole, but until then, how do these captured profits work for Apple?  Best way is to borrow against them, not necessarily for paying dividends, but for long term US CapEx (factories).  The interest is deductible, and you establish more local expense (us payroll, depreciation of buildings/machinery) to,  lower your US 'profits', as you increase your US revenues.


     


    I still think Apple should just become/buy a Bank instead of acting as it's own investment house (it's Nevada hedge fund is underperforming the market).   Issue an Apple Credit Card that is linked to your ITMS account, establish banks in all countries you have a ITMS/App Store, and bypass the merchant fees it's currently paying to Visa/Mastercard, which are likely in the 2-3% range as well, and start collecting 7-20% in interest on the payments (the full payment, not the 30% it makes).  In the end, it likely returns better than it's LT investments.   If Citi and BoA can make money doing credit cards, just think of Apple closing that loop.  And you can see a pretty simple marketing on this...  discounts on those lock in services ('pay with your AppleCard, and you get 10% off your purchase of an iPhone').

  • Reply 17 of 73

    Quote:

    Originally Posted by Squeak View Post


     


    Cheaper to pay the interest to borrow it (2-3%), than to pay the taxes on it (35%).



     


    Assuming they don't have to pay any kind of taxes on the loans. Such taxes could destroy any benefits of such a scheme

  • Reply 18 of 73

    Quote:

    Originally Posted by AppleInsider View Post

    ...

    To pay out that higher dividend, Apple could borrow cash. She noted that the amount of Apple's cash overseas has limited the company's flexibility, but this could be addressed by raising low-interest debt.

    ...


     


    So she really suggests that Apple should get a loan to pay a higher dividend?


    Does she dislike companies with no debt?

  • Reply 19 of 73
    gazoobeegazoobee Posts: 3,754member

    Quote:

    Originally Posted by rob53 View Post


    I agree. My father-in-law is a retired stock broker, practicing back in the days when investors actually invested in companies. At that time, I believe the invested money was actually available and used by the company but that doesn't happen anymore, except at an IPO and especially with a company like Apple that has a ton of cash. I'm trying to remember a time when stock investments actually helped Apple or kept them alive. There might have been a few times but not many and none in the last decade. Apple survives because of its products and in spite of all the manipulation by crazy analysts and investors. The stock market has nothing positive to do with Apple's corporate growth, it's all product acceptance that increases Apple's cash stockpile. All this garbage about about where their stock price will be in a year has nothing to do with how many products it sells. History has taught us that. Apple can have a banner year but some idiot will say it wasn't enough so their stock price goes down. Samsung pumps out tons of garbage, which analysts believe hurts Apple's bottom line, but we all know companies like Samsung that produce throw-away devices will never make any money. Why can't analysts see that? Apple is making money and great products. Analysts need to get out of Apple's way and quit messing around with them. Just get a real job and participate in the re-growth of the US instead of being yet another me-to excuse for an analyst who isn't providing anything valid to this country or world.



     


    Yeah, I'm no business major, but I think a lot of the business concepts we lived by in the 20th Century just aren't applicable to today's world.  


     


    I would bet money that in future business classes Apple will be taught/used as an example of exactly that.  A company that by it's very existence and history disproves some of the most fondly held notions of the business class.


     


    An example for the next century as it were.  

  • Reply 20 of 73
    jungmarkjungmark Posts: 6,834member

    "The company's approach to product decisions and innovation has not changed in the past several years despite the CEO transition"

    no sh|t.
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