Why Apple Should Pay a Dividend

Apple should break with tradition and start paying a dividend, according to analyst firm Bernstein Research
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CUPERTINO, Calif. (

TheStreet

) -- Should

Apple

(AAPL) - Get Report

break with tradition and start paying a dividend?

"In our conversations with shareholders, one common source of frustration -- which is now bordering on exasperation -- has been Apple's burgeoning cash balance," explained analyst firm Bernstein Research in an open letter to Steve Jobs and the Apple board. "We implore you to consider returning cash to your shareholders, along with a longer-term road map for how you plan to use your cash balance and why."

Apple stopped paying dividends in 1995, preferring to focus on growth at a time of stiff competition from the likes of

Microsoft

(MSFT) - Get Report

. Fast forward 15 years, and now Apple sits astride a vast pile of cash.

With a market cap of more than $230 billion and a cash haul of just under $46 billion, Bernstein estimates that Apple only needs $10 billion in cash on hand to run its ongoing operations.

The analyst firm also argues that a dividend payment or share repurchase could help expand Apple's multiple and potentially generate higher earnings per share.

"Given that 20% of Apple's market cap is currently invested in cash at low interest rates, it is harmful to shareholder returns," said the firm in a note released on Thursday. "We believe that both a dividend and share repurchase could comfortably be done in parallel."

Some investors have already

urged the consumer tech giant to open up its coffers.

Others, however, are content for Apple to hold onto its cash, explaining that they would rather see Apple spend its money developing its products.

Dividends are nonetheless becoming more common in the tech sector. Networking giant

Cisco

(CSCO) - Get Report

, like Apple, is famous for steering clear of dividends but said it is planning to offer a dividend at some point in the future. Software giant

Microsoft

(MSFT) - Get Report

also reversed its dividend stance and made its first payment in 2003.

Apple has not yet responded to

TheStreet's

request for comment.

Apple investors shouldn't hold their breath.

Earlier this year, at Apple's annual shareholder meeting, Steve Jobs said that he

prefers holding onto the company's cash hoard

for potential acquisitions and "bold" investments.

"We know if we need to acquire something, a piece of the puzzle to make something big and bold, we can write a check for it and not borrow a lot of money and put our whole company at risk," he said. "The cash in the bank gives us tremendous security and flexibility."

The challenge for many investors, however, is reconciling this stance -- Apple seldom makes acquisitions. When it does, the buys tend to be small, tuck-in deals. Unlike many of its contemporaries in Silicon Valley, Apple has proved its ability to grow without spending big on mergers and acquisitions.

"The company has exercised exemplary fiscal discipline throughout this growth phase -- both in controlling expenses and avoiding costly acquisitions," explained Bernstein in its letter, adding that a dividend could attract a new class of investors. "There are investment managers with mandates that they invest only in dividend-paying stocks -- additionally, some investors are ideologically opposed to investing in companies that lack a clear policy on cash usage."

Apple's shares gained $1.77, or 0.71%, to reach $251.96 on Thursday despite a modest retreat in tech stocks that saw the Nasdaq slip 0.81%.

-- Reported by James Rogers in New York

Follow James Rogers on

Twitter.

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