Morgan Stanley recommends Apple use cash for share buybacks, dividends
Investment bank Morgan Stanley took the position on Monday that Apple is "more likely than ever" to return some of its $76 billion in cash to shareholders and recommended either share buybacks or dividends as the most favorable options.
Analyst Katy Huberty issued a note to investors noting that Apple's $76 billion in cash reserves represent 22 percent of its market capitalization. Of that amount, roughly $29 billion, as of the second quarter of calendar 2011, is held in the U.S., while $24 billion in foreign cash is believed to be eligible for repatriation without additional tax expenses.
Apple has lately been accruing U.S. income tax on about half of its foreign income, a rare move for corporations, according to Huberty. "We believe Apple is the only company in our coverage to accrue such a significant portion," she wrote.
Should the company elect not to return cash to shareholders, Morgan Stanley predicts Apple's cash balance will grow 58 percent year over year to $94 billion by the end of the year, and to $136 billion by the end of 2012.
According to the analyst, Apple's current and future cash flows "greatly exceed" its cash needs. Huberty notes that the company has historically used its cash for capital expenditures, component pre buys and small technology acquisitions. She sees capital expenditures for Apple reaching "a run rate of $5-6 billion in the next couple of years, depending on the pace of the company's data center expansions and the outlay for its new corporate campus in Cupertino, California."
Over the past four fiscal years, Apple has disclosed four major component prepayments -- three for $500 million each and one for $1.25 billion. Meanwhile, small technology acquisitions have averaged $300 million per year during the same period. Huberty estimates that Apple's required annual spending will range from $6-8 billion.
Recently, the company implemented a "relatively new use" of its cash: bulk patent purchasing. For instance, the company spent $2.6 billion on the Nortel auction, which sold off the a collection of more than 6,000 patents.
Huberty's conservative estimate of Apple's cash flow stands at $34 billion in calendar 2011 and another $42 billion next year. Those amounts are "significantly more" than the company needs for expenditures, she wrote.
As such, Morgan Stanley put forth three hypothetical uses for Apple's cash balance: repurchase shares, initiate a dividend, or make a multi-billion dollar strategic acquisition.
According to Huberty, stocks of tech hardware companies that have returned more cash to shareholders through share repurchases have outperformed their peers. She suggests that Apple complete a one-time $25 billion share repurchase followed by a smaller, long-term repurchase program. By reducing the number of outstanding shares, a share buyback program would raise the company's Earnings Per Share.
Though the specifics of any possible buyback would depend heavily on the current stock price and the terms of the deal, Huberty cites one example assuming a $380 stock price and $25 billion worth of buybacks. According to her, that would result in 7 percent accretion to Apple's calendar 2012 EPS, while lowering the company's share count by 66 million shares and forfeiting $125 million of interest income.
The firm also notes that tech companies that have initiated a dividend, have also historically outperformed their peers. Huberty claims Apple would face minor EPS dilution from the corresponding cash outflow, as lost interest income from a $9 billion dividend payment would only amount to $45 million.
The firm's suggested third option of making a substantial acquisition "brings the most risk," Huberty said. She asserted that large-scale mergers and acquisitions have historically had a negative impact on acquirers' stocks. She did, however, note that an acquisition with revenue synergies that help the company increase the "already formidable moat around their device-driven business model" could prove accretive for Apple.
The analyst went on to suggest that a large deal would make sense for the company if it brought in "significant subscription-based earnings" by selling services or content to complement Apple's business model.
For its part, Apple has said it is hanging on to its cash reserves to take advantage of "strategic opportunities." Last year, then CEO Steve Jobs dismissed the possibility of a dividend, noting that the company prefers to keep its powder dry for big moves.
Apple has also been said to leverage its cash balance by offering upfront cash payments to secure competitors and block out competitors. Earlier this year, Tim Cook, who then served as Apple's chief operation executive, revealed that the company had entered into $3.9 billion in long-term component supply contracts over the next two years. In the past, Apple pre-purchased a billion dollars of flash RAM, a move that Cook called an "absolutely fantastic use" of the company's cash.
Bringing its internationally earned cash back into the U.S. could pose a problem for Apple if it decides to make a big move. The company is a member of a consortium lobbying for a tax holiday that would allow U.S. corporations to repatriate an estimated $1 trillion in overseas funds.
In July, it was reported that Apple's stockpile had surpassed the U.S. government's operating balance.
Analyst Katy Huberty issued a note to investors noting that Apple's $76 billion in cash reserves represent 22 percent of its market capitalization. Of that amount, roughly $29 billion, as of the second quarter of calendar 2011, is held in the U.S., while $24 billion in foreign cash is believed to be eligible for repatriation without additional tax expenses.
Apple has lately been accruing U.S. income tax on about half of its foreign income, a rare move for corporations, according to Huberty. "We believe Apple is the only company in our coverage to accrue such a significant portion," she wrote.
Should the company elect not to return cash to shareholders, Morgan Stanley predicts Apple's cash balance will grow 58 percent year over year to $94 billion by the end of the year, and to $136 billion by the end of 2012.
According to the analyst, Apple's current and future cash flows "greatly exceed" its cash needs. Huberty notes that the company has historically used its cash for capital expenditures, component pre buys and small technology acquisitions. She sees capital expenditures for Apple reaching "a run rate of $5-6 billion in the next couple of years, depending on the pace of the company's data center expansions and the outlay for its new corporate campus in Cupertino, California."
Over the past four fiscal years, Apple has disclosed four major component prepayments -- three for $500 million each and one for $1.25 billion. Meanwhile, small technology acquisitions have averaged $300 million per year during the same period. Huberty estimates that Apple's required annual spending will range from $6-8 billion.
Recently, the company implemented a "relatively new use" of its cash: bulk patent purchasing. For instance, the company spent $2.6 billion on the Nortel auction, which sold off the a collection of more than 6,000 patents.
Huberty's conservative estimate of Apple's cash flow stands at $34 billion in calendar 2011 and another $42 billion next year. Those amounts are "significantly more" than the company needs for expenditures, she wrote.
As such, Morgan Stanley put forth three hypothetical uses for Apple's cash balance: repurchase shares, initiate a dividend, or make a multi-billion dollar strategic acquisition.
According to Huberty, stocks of tech hardware companies that have returned more cash to shareholders through share repurchases have outperformed their peers. She suggests that Apple complete a one-time $25 billion share repurchase followed by a smaller, long-term repurchase program. By reducing the number of outstanding shares, a share buyback program would raise the company's Earnings Per Share.
Though the specifics of any possible buyback would depend heavily on the current stock price and the terms of the deal, Huberty cites one example assuming a $380 stock price and $25 billion worth of buybacks. According to her, that would result in 7 percent accretion to Apple's calendar 2012 EPS, while lowering the company's share count by 66 million shares and forfeiting $125 million of interest income.
The firm also notes that tech companies that have initiated a dividend, have also historically outperformed their peers. Huberty claims Apple would face minor EPS dilution from the corresponding cash outflow, as lost interest income from a $9 billion dividend payment would only amount to $45 million.
The firm's suggested third option of making a substantial acquisition "brings the most risk," Huberty said. She asserted that large-scale mergers and acquisitions have historically had a negative impact on acquirers' stocks. She did, however, note that an acquisition with revenue synergies that help the company increase the "already formidable moat around their device-driven business model" could prove accretive for Apple.
The analyst went on to suggest that a large deal would make sense for the company if it brought in "significant subscription-based earnings" by selling services or content to complement Apple's business model.
For its part, Apple has said it is hanging on to its cash reserves to take advantage of "strategic opportunities." Last year, then CEO Steve Jobs dismissed the possibility of a dividend, noting that the company prefers to keep its powder dry for big moves.
Apple has also been said to leverage its cash balance by offering upfront cash payments to secure competitors and block out competitors. Earlier this year, Tim Cook, who then served as Apple's chief operation executive, revealed that the company had entered into $3.9 billion in long-term component supply contracts over the next two years. In the past, Apple pre-purchased a billion dollars of flash RAM, a move that Cook called an "absolutely fantastic use" of the company's cash.
Bringing its internationally earned cash back into the U.S. could pose a problem for Apple if it decides to make a big move. The company is a member of a consortium lobbying for a tax holiday that would allow U.S. corporations to repatriate an estimated $1 trillion in overseas funds.
In July, it was reported that Apple's stockpile had surpassed the U.S. government's operating balance.
Comments
Yeah, maybe they should keep their mouths shut when it comes to what companies need to do with their profitable cash stockpiles.
This is the Morgan Stanley that went bankrupt and was sold to Bank of America to remain solvent?
Yeah, maybe they should keep their mouths shut when it comes to what companies need to do with their profitable cash stockpiles.
Couldn't agree more. Why are they still around?
they are part of the gang of thieving banks that put the country into the grips of depression. borrowing money at 0% and lending it back at give or take 20%. to this day they haven't come clean while trying to outdo goldman sachs in sleaze. and throw in bank of america to the pile of manure. no more outrageous bonuses using the taxpayer as a backstop.
bring back glass steagall in full force and make these guys work for a living or make them fail. they are not too big to fail. banks and brokers must be separated.
They can kiss my behind.
Dividends would be a good idea. It would actually make the stock more attractive. Not too much though. Apple is wise to keep lots of cash on hand. There will be more lawsuits on the way, and they'll need to pay for defense. I also think there is a financial firestorm coming, and any company without a treasure chest (relative to their size) won't survive.
No it wouldn't. Dividends are issues by Stocks that are done growing.
Uhm... Can anyone tell me what they know best? I'm drawing a blank...
In fact, I would expect them to do so. Share buybacks usually destroy shareholder value because they tend to happen when the share price is high (in an effort to drive it even higher). Cook has the discipline to buy back only when the shares are grossly under valued.
I'm kind of hoping that it happens.
MS analist (not mispelled) looking for a quick boost to Apples stock price.
Uhm... Can anyone tell me what they know best? I'm drawing a blank...
Scandals? Incompetence? Ineptitude?
Source: en.wikipedia.org/wiki/Morgan_Stanley
In order to cope up with the write-downs during the subprime mortgage crisis, Morgan Stanley announced on December 19, 2007 that it would receive a US$5 billion capital infusion from the China Investment Corporation in exchange for securities that would be convertible to 9.9% of its shares in 2010.[11]
The bank's Process Driven Trading unit was amongst several on Wall Street caught in a short squeeze, reportedly losing nearly $300 million in one day. One of the stocks involved in this squeeze, Beazer Homes USA, was a component of the then-bulging real estate bubble. The bubble's subsequent collapse was considered to be a central feature of the financial crisis of 2007?2010.[12]
The bank was contracted by the United States Treasury in August 2008 to advise the government on potential rescue strategies for Fannie Mae and Freddie Mac.[13]
Just for fun, go to your favorite stock quote website and graph the MS share price for the past five years against APPL.
What does the stock symbol for Appell Petroleum Corporation have anything to do with this discussion?
One more thing, Katy is one of the worst analysts tracking Apple.
Oh, and Earnings Per Share doesn't need to be capitalized. Dummies.
The only way I can see AAPL doing a share buyback is if there is another financial meltdown, and their shares drop well below $300.
So you're saying you don't think Apple shares are worth buying at this price, and are only a good deal below $300? Why else would you discourage any entity from buying Apple shares (even if it's Apple itself)?
I think Apple should use the cash to buy Morgan Stanley just to get them to STFU.
No it wouldn't. Dividends are issues by Stocks that are done growing.
Oh... and what are stocks with a PE of 15? Really... a PEG of less than 0.3!
Personally, I am happy with the return on my deep in the money calls, although dividends would be nice. I imagine the reason why Apple doesn't do them is linked to employee compensation.
Hmm let's see, who should we trust. A company that actually innovates and creates jobs and value, or a parasite feeding of the failing global financial system.
I think Apple should use the cash to buy Morgan Stanley just to get them to STFU.
Jesus. I assume that you're an Apple shareholder. You realize that Apple is holding money that belongs to you, right?
This is the Morgan Stanley that went bankrupt and was sold to Bank of America to remain solvent?
Yeah, maybe they should keep their mouths shut when it comes to what companies need to do with their profitable cash stockpiles.
Merrill Lynch was sold to Bank of America in an attempt to avoid the fate that Lehman Bros had.
It was sold for I believe $40 Billion.