Why Apple Inc. (AAPL) Shares Suddenly Popped $14 Intraday

It started off as a relatively slow morning for Apple Inc. (NASDAQ:AAPL) shares, down in line with the broader market. The stock was trading lower and touched $452.58 halfway through the morning, and all of a sudden shares leapt higher on heavy volume by nearly $14 to hit $466.50 — green turf, for those keeping score at home.

Apple Inc (NASDAQ:AAPL)

AAPL data by YCharts.

What was feeding the bulls?

Dr. Jekyll, Mr. Hyde, and Mr. Cook
Renowned mutual fund manager Bill Miller is out with some bullish sentiment on the Mac maker, saying that shares are undervalued at current prices. The Financial Times ran an article last night on his stance, which began to make the rounds today.

Apple Inc. (NASDAQ:AAPL)

In it, Miller compares Apple Inc. (NASDAQ:AAPL) to Nike (NYSE:NKE) as a strong consumer brand with “great loyalty” among customers. That comment would please Steve Jobs, since he had always admired the brand that Nike had built. Miller is widely known as a value investor, even as he appreciates a good growth story when he hears one.

Miller’s bullishness on Apple Inc. (NASDAQ:AAPL) is nothing new, but having a high-profile value investor reiterating optimism over the company’s prospects is more evidence that Apple is transitioning to a value stock that can attract dividend and income investors.

Miller is also doing an interview on the WealthTrack TV show that airs this Friday, and a preview was disseminated last week. Much of the discussion revolves around Apple’s capital allocation and how its balance sheet alone can become a powerful catalyst for a recovery.

The fund manager goes as far as to call Apple a “Dr. Jekyll and Mr. Hyde company” since it has such an innovative culture within technology, yet is “terrible” at allocating capital since it generates more cash than it knows what to do with. AAPL’s current dividend was only made possible by Tim Cook, and is certainly conservative relative to Apple’s cash generation.

Party like it’s Apple returning free cash flow
One suggestion is for Apple Inc. (NASDAQ:AAPL) to simply continue sitting on its $137.1 billion in cash, but simply distribute future free cash flow in the form of a dividend to shareholders. That move alone could send shares higher to the tune of 50%, according to Miller.

Let’s dig into this notion a little bit. Apple Inc. (NASDAQ:AAPL)’s free cash flow has soared in recent years as it continues to mint money from operations. Capital expenditures have also risen as the company invests heavily in product tooling and manufacturing gear as well as expanding and remodeling retail locations to a lesser extent.

Metric FY 2010 FY 2011 FY 2012 Q1 2013
Operating cash flow $18.6 billion $37.5 billion $50.9 billion $23.4 billion
Capital expenditures $2.1 billion $7.5 billion $9.4 billion $2.5 billion
Free cash flow $16.5 billion $30 billion $41.5 billion $21 billion

Sources: 10-K and 10-Q filings. FY = fiscal year. Figures may not sum exactly due to rounding.

To put these figures into context, in the fiscal first quarter, Apple generated more free cash flow than it did through all of fiscal 2010. In the meantime, Apple’s current quarterly dividend of $2.65 amounts to about $2.5 billion per quarter. The company also repurchased about $2 billion in stock last quarter, a little more than offsetting share dilution from equity compensation, which is the whole goal of the program.

Needless to say, if Apple Inc. (NASDAQ:AAPL) were to boost its dividend by over eight times, I would expect investors to party it up with all the cash coming their way.

WinTel pays better
While it seems that Apple could afford to do so since it has more than enough cash to run the ship, it’s not quite that simple. The $137.1 billion money mountain currently consists of $94.2 billion internationally and $42.9 billion stateside. Not only is roughly 60% of sales generated internationally now, but Apple also legally funnels revenue abroad as part of its tax strategy.

This is why Apple’s international cash always increases sequentially, while its domestic coffers change less predictably and occasionally decline.

Source: SEC filings.

Since most of its cash is being either generated or funneled abroad, paying out all of free cash flow faces the very significant hurdle of repatriation taxes. Still, Apple Inc. (NASDAQ:AAPL) can and should increase its dividend to reinstill confidence among investors. Its payout ratio still lags rivals that have worse prospects than itself — namely, Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC).

Metric (MRQ) Apple Microsoft Intel
EPS $13.81 $0.76 $0.48
Dividend $2.65 $0.23 $0.225
Payout ratio 19% 30% 47%

Source: SEC filings. MRQ = most recent quarter.

Miller’s free-cash-flow payout idea sure sounds nice, but ultimately it’s not realistic due to the international composition of Apple’s cash. But no one will argue that Apple Inc. (NASDAQ:AAPL) can’t afford a dividend hike of some degree.

The article Why Apple Shares Suddenly Popped $14 Intraday originally appeared on Fool.com.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple, Intel, and Nike. The Motley Fool owns shares of Apple, Intel, Microsoft, and Nike.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!