Apple Inc. (AAPL) has an enormous pile of cash -- about $163 billion, to be exact. So how will the tech giant follow through on plans to get that $163 billion down to zero?
"We think Apple leans toward buybacks with the potential to increase the dividend yield closer to other large technology companies," said UBS analysts in a Feb. 14 note. The fastest means of getting cash to zero would be aggressive buybacks, while another slower option would be doubling the buyback program and increasing the dividend yield.
According to analysts, the most likely scenario is that Apple reduces its share count by 7% per year for the next six years and boosts its dividend yield to 3%, achieving net zero cash by fiscal 2023. Should such an "accelerated" share buyback program be announced, Apple will likely enact further upward revisions to earnings estimates.
Apple, an Actions Alerts Plus portfolio holding, has historically accounted for between 1% and 4% of the stock's daily trading volume. "We assume Apple could reach a maximum of 5% of daily trading volume without impacting the price, if it intends to aggressively buy back stock," UBS said.
If Apple is looking to use only share buybacks to trim down its cash, it could repurchase 10% of its shares each year. Should that happen, zero net cash is achievable by 2021, UBS said, and out-year earnings estimates would increase as much as 30%.
Another scenario would see Apple double buybacks to $60 billion from $30 billion per year and increase the dividend yield to 3% from 1.6%. That would put Apple more in line with the likes of International Business Machines Corp. (IBM) or Hewlett-Packard Inc. (HPQ) . That combination would lead to 7% share reduction for six years and zero net cash by 2023, UBS said.
Transformational M&A or some kind of special dividend would be "surprising," UBS wrote. CEO Tim Cook said at the annual Apple shareholder meeting that he "was not really a fan" of special dividends. "On the M&A front, we expect Apple to continue its strategy of filling technology or personnel gaps with small tuck-in acquisitions," UBS said.
Regardless of how Apple gets to zero net cash, UBS said, "We don't think the capital structure much affects Apple's valuation -- ROIC and growth are the critical metrics."
UBS maintains a buy rating on Apple stock with a $190 price target, implying about a 14.5% upside for the stock. Apple shares were higher 1.84% to $167.37 at the market close Wednesday.
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