Apple Recovery: What Needs to Happen (Update 1)

Updated from 9:45 a.m. EST to provide Barclays comments regarding product plans on the the third page.

NEW YORK ( TheStreet) -- Apple ( AAPL) has had a rough go of it in recent weeks and months. However, there are signs that the stock is capitulating. The road to recovery has multiple phases, and it starts with returning more cash to shareholders.

In a research note, Topeka Capital Markets analyst Brian White lays out a three-step process to building more value for Apple shareholders. The first phase talks about Apple's massive cash hoard, which has been the subject of much angst and controversy in recent weeks, as Greenlight Capital's David Einhorn and others draw attention to it.

Last year, Apple announced it would be returning $45 billion in cash to shareholders, as part of a dividend and buyback program, with a quarterly dividend of $2.65 per share. While that was a good start, Apple's cash hoard has grown significantly higher, and investors are clamoring for Apple to return more.

"We think of Apple as being able to generate approximately $50 billion in free cash flow per year," White wrote in his report. "We continue to believe that Apple should increase its quarterly cash dividend payout to $3.75 to $5.00 per share (annual yield of 3.3% to 4.4%)." White rates Apple shares a "buy" with an $888 price target.

At Apple's shareholder meeting and on its first-quarter earnings call, Apple management, including CEO Tim Cook and CFO Peter Oppenheimer, both said Apple is thinking about its cash hoard and what to do with it. Cook described the talks as "very, very active," hinting that something would be done to appease shareholders.

White noted that aside from Apple raising its dividend, it has the capacity to raise its repurchase program to as high as $100 billion as part of a five-year plan.

Given Apple's management is conservative with its cash, I, for one, don't see anything that aggressive coming out of Cupertino.

Next, White noted that Apple's profit cycle has to hit a trough, then bounce back up. White estimates that Apple's operating profit and earnings per share will decline 19% year-over-year in the second quarter of fiscal 2013, before bouncing back in the latter part of the year.

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