David Einhorn Has A Point: Show Us The Money, Apple Inc. (AAPL)

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Unlock Value by Unlocking the Cash

Apple should do the same.  No stock can continue to expand at world-beating growth rates forever.  This isn’t necessarily a bad thing — just a mathematical reality.  Apple has grown earnings per share at a compound annual rate of almost 60% over the last four years.  Even Apple can’t continue to replicate that kind of growth forever.  Someday, growth will slow—and perhaps that day is upon us.

Apple has such a huge amount of cash on its balance sheet that not paying a larger dividend and/or increasing its stock buyback is doing shareholders a disservice.  Short-term interest rates are near zero.  Apple’s cash and marketable securities probably aren’t earning more than 1% annually for the company.  Apple could double its dividend and yield more than 4.5% at recent prices, thereby creating value for its loyal shareholders.

The company should avoid the temptation to do something foolish for lack of a better idea.  Don’t make an ill-advised acquisition, Apple.  Microsoft bought Skype for $8.5 billion in 2011, and as far as I can tell, that wasn’t a value-add for shareholders.

Some Apple shareholders may not want the company to increase its dividend, out of fear that the company would soon be priced similarly to its big-cap tech brethren.   But I have news for them: we’re already there.   Apple in fact trades for lower multiples than either Microsoft or Intel, ex-cash.  Apple’s stock is no longer the darling of the growth-investing community.  Like it or not, it’s being priced as a value stock, and in order for institutional value investors to buy, Apple needs to give them more.

Value investors may be enticed by a 7 forward multiple ex-cash, but a 2.3% dividend isn’t likely to bring them in.  Double the dividend and increase the buyback, Apple.  The company can easily afford it, and doing so will have a negligible effect on the company’s ability to earn mountains of cash.

As it stands, the company’s dividend payout ratio is less than 25% of fiscal 2012 earnings.  Apple, if you show investors that you’re making productive use of the $137 billion currently doing nothing in your bank, you may just see higher multiples sooner rather than later.

The article David Einhorn Has A Point: Show Us The Money, Apple originally appeared on Fool.com and is written by Robert Ciura.

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