Anyone who follows the markets can tell you that Apple Inc. (NASDAQ:AAPL) has been one of the worst performing stocks of the last six months. At a time when the Dow and S&P seem to be making new highs daily, Apple shareholders are spending the days hoping that their 38% drop from the highs doesn’t get any worse. With all of the rumors flying around, which are actually likely, and more importantly, what impact will they have on the company if they actually happen?
One thing that we can definitely not assume is that Apple Inc. (NASDAQ:AAPL)’s stock performance will make sense. Currently priced for zero growth, not even including cash, shares are now trading in single-digit P/E ratios. Even the lowered consensus estimates are calling for growth of 12.8% next year and 12.1% the year after that. As I’ve said before, if the market made sense, we would all be rich! On to the possibilities…
Of all of the possible scenarios, this may be the most likely to happen soon. If there is a dividend hike, I would expect Apple to raise the yield to around 3.5%. I don’t foresee a dividend raise causing the shares to rise tremendously; however, what this does do is create a price floor. As stock prices fall, yields go up, so this effectively limits the amount that Apple Inc. (NASDAQ:AAPL) can fall before the yield gets high enough to attract new buyers. The “price floor” effect may boost the share price a bit, but I think the cash stockpile could be put to better use.
Likelihood (scale of 1-10): 8
This is the way that I would prefer Apple to return capital to shareholders, and in my opinion would create much more confidence than a dividend increase. Although Apple currently has a buyback in place, it is just enough to negate the effects of stock options maturing.
If Apple Inc. (NASDAQ:AAPL) were to come out and throw substantial cash into a buyback, it would be akin to them saying “We think our shares are trading at a deep discount right now, so instead of just handing back cash to shareholders, we want to take full advantage of this bargain!” I think this will do much more for the share price than a dividend hike of an equal amount.
Other Ways Apple Can Return Cash
There are many other ways Apple can put its cash to use, and the most speculated is the takeover of a big company. I don’t think this will happen, but it’s entirely possible. Unless Apple sees a tremendous opportunity, for example, taking over Pandora Media Inc (NYSE:P) to get a stronghold on internet radio, I think Apple Inc. (NASDAQ:AAPL)’s cash could be put to better use.
Likelihood: 2, but there are some interesting possibilities
Speaking of internet radio, there has been a rumor going around for some time that Apple is going to try and enter this market. While I think they will make some sort of internet radio product, shareholders of Pandora shouldn’t be too worried. I see Apple Inc. (NASDAQ:AAPL)’s internet radio offering as a nice additional feature for users of their products, not a market-dominating radio service.
The problem with trying to take over too much of Pandora’s market share is simple: Pandora got it right the first time. I simply can’t see Apple Radio’s content delivery, or the cost of their premium service (if there is one) to be any better than Pandora Media Inc (NYSE:P)’s. However, an Apple radio service will be a small benefit to the company’s loyal users, but probably not much help to their bottom line, or their share price.
I’m not as psyched about the possibility of a watch-like device from Apple Inc. (NASDAQ:AAPL). While it could indeed be useful and trendy, my fear is that it will take business away from Apple’s other products (why buy an iPod Nano for working out if my music is on my wrist?). However, the news of Apple putting out a new, innovative product may be enough to boost the share price back to the $500 range. I just don’t see this adding a ton of revenue over the long run.