Apple's Buyback Program May Mean a Higher Dividend

NEW YORK (TheStreet) -- Apple's (AAPL) share-buyback program is becoming increasingly difficult for the market to ignore. The company accelerated the pace and aggressiveness lately, albeit not to the degree desired by hedge fund manager Carl Icahn.

The iPhone maker has removed over $40 billion worth of shares from the float during the last year, including about $14 billion since the start of 2014.

I have mixed feelings about CEO Tim Cook's focus on the daily share price. Wall Street is far from perfect, but it is the most efficient stock pricing mechanism known. Cook needs to worry about creating and producing the next iHit product that people will stand in line overnight in the cold for -- just to get a chance to wrap their hands around an expensive, um, premium-priced iGizmo.

Cook was quoted in the Wall Street Journal as stating he was "surprised" by the market's reaction to lower iPhone sales and revenue estimates. Cook may want to be opportunistic and buy when shares are cheap, but how does he know they won't become cheaper? He doesn't, and because his card says CEO of Apple, not CEO of a hedge fund, he shouldn't partake in market timing.

That doesn't mean he should follow the marching orders of Carl Icahn, but he should remain focused at the job he collects his paycheck and stock options for. For about half the money, Apple could have bought Yahoo! (YHOO)

Buying Yahoo! makes sense for more than just Apple, but from Apple's point of view, it's more attractive than buying its own shares and would cost less. I first presented my idea in Why Apple Should Buy Yahoo! back in October.

There are silver linings from Apple's buying its own shares instead of Yahoo!'s. A reduction in supply tends to make anything more valuable, and Apple isn't an exception. Fewer shares to pay a dividend on results in a lower total cost of declaring dividends and subsequently enables a company to increase its dividend.

For the stated reasons, many investors love it and will buy more shares. Overall, I don't believe share buybacks are advantageous for shareholders of most stocks, but if the conditions are right, a buyback can make sense.

Apple doesn't have an abundant number of other uses for its cash at a scale that can affect the stock price to the same degree. Apple could go on a buying spree as Yahoo! CEO Marissa Mayer has, but it's still not as easy for Apple as it is for Yahoo!.

Another use of the mountain of cash collecting dust inside bank accounts is to raise the dividend, and I believe that's Cook's next move in pumping the share price higher. With fewer shares in the float to pay a dividend toward, the company can more easily announce a hike. Apple's fantastic free cash flow numbers easily support a higher yield.

A dividend increase is Cook's biggest bang for the buck, and if he is already concerned about the share price, you know he's already considering, if not decided, to act on it.

The amount may appear limited due to tax consequences of repatriating cash held overseas into United States. In order to significantly increase the dividend without borrowing, Apple needs to transfer funds held outside the U.S., and money that is transferred is subject to U.S. taxation.

Once in a while enough pressure builds in Congress, that a tax holiday is offered to multinational companies that waive most or all of the double taxation. But acts of Congress are about as far removed from certainty as you can travel.

Regardless, expect Apple to boost the yield, and all things being equal, you want to be a buyer before an announcement, not after.

After last week's dip in stock price, now is an especially opportune time.

At the time of publication, Weinstein had no positions in the stocks mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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