Apple Inc. (NASDAQ:AAPL) certainly receives its fair share of coverage throughout the trading day, and then some. Earlier this week, we broke news that noted analyst Gene Munster, of Piper Jaffray, was lowering his forecast for the next couple quarters. Specifically, Munster thinks that Apple will only bump its dividend from $10.60 to $14, less than what many bulls are hoping for.
Jim Cramer was also on CNBC discussing the situation earlier on the Tuesday (March 26th) that this was announced, and at Mr. Market’s close, the “Fast Money” team was talking about what the analyst community thought about Apple Inc. (NASDAQ:AAPL)’s potential income-boost.
Jon Fortt, of CNBC Business News, discussed the thoughts of “a couple of analysts,” mentioning, “they’re muted,” adding (emphasis placed):
“I’ve seen some people saying analysts want a 50% hike, even a doubling of the current dividend; people I’m talking to are more in line with Gene Munster over at Piper Jaffray […] around 32-33%. The reason why is twofold […] One, two-thirds of Apple’s cash is overseas. They’ll get hit with a big tax if Apple tries to bring it back for dividends. The other is precedent. If they hike the dividend by 50% this year, people expect another 50% hike next year. You can always increase the dividend by more in the future, but if you slow down the rate of hikes, it looks bad.”
Regarding Apple Inc. (NASDAQ:AAPL)’s move, Fortt asked an important question: “What if Apple does boost it to $3.50 a share, or more than $15 billion a year?”
The newly upped dividend yield “would be in line with Cisco Systems (NASDAQ:CSCO) , Hewlett-Packard and Microsoft, but still less than Intel (NASDAQ:INTC) ,” he added.
At current levels, Apple offers a dividend yield of 2.3%, while Cisco (2.7%) and Hewlett-Packard (2.3%) are in the same vicinity. As Fortt points out, yes it’s true that Intel pays a better yield of 4.1%, but the tech giant’s payout ratio is more than thrice as high, at 39.4%. Cisco, meanwhile, also sports a payout ratio above the 30% threshold.
Apple Inc. (NASDAQ:AAPL) pays just 12% of its earnings to shareholders in the form of dividends.
More importantly, Fortt also pondered: “Would it be the kind of catalyst that would cause the stock to run like last year?”
This is the question that many perma-bulls have already answered themselves, and may be at least one reason why mega-investment funds like David Einhorn’s Greenlight Capital and David Tepper’s Appaloosa Management LP were upping their stakes last quarter.
Still, Apple obviously has its fair share of bears—say that five times fast—and Fortt’s sources think that a Munster-esque hike would NOT satisfy the market’s majority.
“Fast Money” host Melissa Lee’s reasoning is sound:
“If you increase the dividend, it opens all of a sudden Apple to become the holding of a dividend fund that needs to see the dividend increases in order to invest in a stock.”
Reformed Broker Josh Brown talked about Apple Inc. (NASDAQ:AAPL)’s decision, inferring that not all types of income boosts are indicative of an attractive company from an investment standpoint, saying “Talk to an Intel shareholder, and ask him how he likes his 3% dividend.”
SkyBridge Capital founder Anthony Scaramucci had a similar opinion:
because of the return on invested capital is still higher than giving out a dividend, so that’s the big dilemma here. They’re getting pushed by outside investors to do it, and I hope that Tim Cook stays true to the culture of Apple.”
Brown had an interesting outlook on over the next six-month period, mentioning that:
“When the new line of products and new refreshes come out—that has a better shot at being a driver, than whether or not the dividend is 2 or 3%. That is not what’s going to bring growth investors back into the stock, bidding it higher, expanding the multiple. There’s just no way.”
Of course, each investor is entitled to his or her own opinion, but it’s thoughts like these that likely draw the ire of many Apple Inc. (NASDAQ:AAPL)-focused optimists operating on Main Street, thinking that a dividend hike will bring green returns to their portfolios.
So what can investors do in the meantime?
Well, it sounds cliché, and if you’re reading this, that probably means that you’ve heard it a thousand times, but we’ll say it again: the iWatch. As we pointed out in our analysis of the 14 best iWatch concept designs, Sanford C. Bernstein analyst Toni Sacconaghi considers that if the device retails for $250 and only 5% to 8% of current iPhone users buy one, that would translate into $3.4 billion to $5.7 billion in annual revenues.” That’s a decent amount of dough, but critics may cry that it represents just a 2-3% upside from Wall Street’s FY2013 revenue projections for Apple, just north of $180 billion.
Focusing on the product cycle, as Brown pointed out, the best-case scenario bulls should be hoping for is the launch of an iWatch and an iTV by the end of 2013. Last year, Morgan Stanley estimated that a smart television could make Apple $13 billion per year in the U.S. alone, though no long-range growth estimates were given. Morgan Stanley’s report also hypothesized that a global release of an Apple iTV could increase these projections by fourfold.
So, instead of talking about how much Apple Inc. (NASDAQ:AAPL)’s dividend hike might be, we should be talking about the different scenarios that can empower growth investors to take a second look at this stock. A dual-release of a watch and a TV by the end of this year is obviously what many are hoping for, but it’s worth noting that just one of these devices can boost Apple’s top and bottom lines, which in turn, can pad investors’ wallets accordingly. See how popular Apple still is in Wall Street circles.
How much will it cost ‘ya?
Luckily for every Apple bull under the sun, shares of the Cupertino-based tech company are extremely cheap right now. At a forward price-to-earnings multiple below 9x, Apple trades at a steep discount to most of its aforementioned peers, including Cisco (9.9x) and Intel (10.2x). Yes, both Cisco and Intel offer more to income investors at the moment, but it’s Apple’s value potential that sets it apart.
With this in mind, we should also point out that when we account for expected earnings growth — Wall Street predicts Apple to average 18.9% annual EPS growth over the next half-decade — Apple is an even better buy. Using the PEG ratio, which is a simple acronym for the term “Price-to-Earnings Growth,” we can see that Apple sports a PEG of 0.5.
Cisco, meanwhile, is nearly three times as expensive at a PEG of 1.4, and analysts expect its EPS growth to average 8-9% a year over the next five years. Intel’s PEG, near 0.9, is a bit lower, but still above Apple, and it’s five-year expected EPS growth clocks in around 11% annually.
It’s clear that Mr. Market is valuing Apple Inc. (NASDAQ:AAPL)’s growth prospects much more along the lines of a Cisco or an Intel, but interestingly, Wall Street still holds far more optimistic EPS estimates over the intermediate term. Whether or not Apple can meet these expectations is up for debate, but if they can at least come close, it’s hard not to think there’s some value-based appreciation in store.
The article What Does the ‘Fast Money’ Roundtable Think About Apple? originally appeared on Fool.com.
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