Apple Inc. (NASDAQ:AAPL) shares have been taking a beating this year. Fear has crept into expectations that the purveyor off all things iRelated isn’t going to deliver a blowout holiday quarter when it reports on Wednesday. As a result, Apple has underperformed the Nasdaq Composite Index by more than 9% year to date. One school of thought suggests a dividend hike is just what Apple shares need to find some relief.
$250 billion reasons
Bernstein estimates Apple’s cash balance is going to explode from $121 billion today to $250 billion in three years’ time. The firm makes the case that Apple could double its dividend rate or authorize a large-scale buyback (10% of float) and would only spend an additional $50 billion over a five-year period. Obviously, the cash needed to fund a dividend hike isn’t the issue. It’s a matter if it’s the right use of capital, especially since Apple has only paid out two dividends since approving this recent measure. Consequentially, investors may become disenchanted that Apple Inc. (NASDAQ:AAPL) authorized an additional dividend hike, a telltale sign the company is literally out of ideas on how to put its capital to work.
Easy to overlook
Investors may be overlooking that fact that Apple’s cash balance is currently being invested, earning some sort of return, and is compounding over time. Shelby Davis, the investor who turned $50,000 into $900 million dollars over a 50-year period, made his fortunes off of companies in similar situations as Apple Inc. (NASDAQ:AAPL). Focusing primarily in insurance, he would identify companies with large cash reserves to act as unrecognized “compounding machines,” which the market deeply discounted. Over the long term, the market would slowly recognize this value, earnings would continue to grow, and eventually shares would experience tremendous P/E multiple expansion. Considering its massive cash balance and the fact that Apple currently trades at nearly a 50% discount to the S&P 500, could Apple Inc. (NASDAQ:AAPL) be a “Davis Double Play” in the making? If this were the case, long-term shareholders would benefit far greater than a dividend double-down.
There’s no doubt that Apple Inc. (NASDAQ:AAPL) is at the center of technology’s largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool’s senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple Inc. (NASDAQ:AAPL), and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple Inc. (NASDAQ:AAPL), simply click here now.
The article Can a Dividend Hike Rescue Apple Shares? originally appeared on Fool.com.
Fool contributor Steve Heller owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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