Apple (AAPL): Dividend or Buyback?

Share buybacks have a bad reputation. Between 2004 and 2011, members of the S&P 500 bought back a combined $2.7 trillion in stock squandering billions of dollars in shareholder wealth by purchasing overpriced shares.

But is this the case with Apple Inc. (NASDAQ:AAPL)? There’s a perception the stock is undervalued. Shares are trading below 10 times trailing earnings and the company is priced at a discount to industry peers on every metric. After backing out the cash on the company’s balance sheet, the market is valuing Apple’s entire business for less than seven times trailing earnings. By buying back stock, shareholders would be increasing their stake in a undervalued business.

Advantage: Buyback

Shareholders

What do shareholders want?

Apple is still a growth stock. Most shareholders are aggressive investors looking for capital gains rather than utility-like dividends.

This may be changing. Since Apple announced its first dividend last year, it has attracted legions of yield-hungry investors who would like nothing more than a steady stream of checks into their brokerage accounts. Arguably through, these types of investors are a bad fit for Apple, which operates in a rapidly changing and volatile industry. Increasing the dividend would only increase the mismatch in the type of shareholders that are suitable to hold Apple Inc. (NASDAQ:AAPL) stock.

Advantage: Buyback

Foolish bottom line

The evidence is clear. Buybacks are the best way to return capital to Apple shareholders.

The article Apple: Dividend or Buyback? originally appeared on Fool.com and is written by Robert Baillieul.

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