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A New Dividend Policy For Apple

Summary

Apple has $200 billion in overseas cash.

Repatriating this cash would mean Apple has $136 billion in cash available right now.

I believe hiking up the dividend whilst keeping share buybacks at a high level would be beneficial for all shareholders.

Rising dividends can have a strong impact on share prices, we have seen this with Cisco earlier this year.

Demand for consumer stocks with strong dividend yields is very high.

Apple's (NASDAQ:AAPL) stock price has been moving up over the last weeks, due to an improving outlook for the second quarter and the rest of the year, as the new iPhone SE seems to be a hit and focus is increasingly shifting away from the iPhone 6s and towards the coming iPhone 7. Apple has stated that the company would announce a new shareholder returns strategy in the near future, and in this article I'll look at a way Apple could act in order to increase shareholder value.

Let's first take a look at Apple's financials:

Apple produced free cash flows of $63 billion over the last year, and has a cash pile of $216 billion on its balance sheet (consisting of $178 billion in long-term investments and $38 billion in short-term investments and cash). Apple has paid out $37 billion to its shareholders in the form of stock buybacks and $12 billion in the form of dividends (for total shareholder returns of $49 billion).

We know that $200 billion of these $216 billion Apple has in cash are located overseas, which means that these cash amounts are not easily available for shareholder returns in the form of dividends or share repurchases (but could be used to make acquisitions, as long as the target is not headquartered in the US).

So far Apple has used another tactic to keep paying large amounts to its shareholders: Apple issues bonds in the US and uses the cash proceeds to pay for dividends and stock buybacks (in addition to the cash flows the company generates in the US). Since Apple has a huge cash position and rather low debt (and interest rates are low in general), the debt Apple issues is cheap and the interest expenses do not really hurt Apple's bottom line (especially since the cash Apple holds offshore also produces interest income).

Apple could, however, also choose to repatriate the cash the company holds offshore, which would mean Apple would have to pay the taxes on said cash, but the company could then use this cash to increase shareholder returns.

Since the corporate tax rate in the US is 40%, Apple would be able to net $120 billion from its $200 billion in offshore cash, which, in combination with the $16 billion in US cash Apple holds on its balance sheet, would equal $136 billion Apple could spend on shareholder returns (or other things), excluding any future cash flows. This means the cash that would be immediately available for shareholder returns is equal to 22% of Apple's market capitalization of $610 billion. Apple hasn't done so in the past, but Apple hasn't had a cash pile this large relative to the company's market capitalization ever: At the end of 2014, Apple's cash position relative to its market capitalization stood at 24%, at the end of 2013 the cash position relative to its market capitalization stood at 29% and at the end of 2012 its cash position relative to the company's market capitalization stood at 24% - right now Apple's cash position relative to its market capitalization stands at 36%, which is the highest level ever by far. I thus believe it is more likely that Apple will utilize its huge cash pile (including repatriating its overseas cash) now, as its cash pile is much bigger now than it ever was before, in relative terms as well as in absolute terms.

Apple returns a lot of cash to its shareholders, mainly in the form of share repurchases, but this approach hasn't been very successful in generating higher share prices, as Apple's share price is...


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