In the following video (watch here), Motley Fool senior technology analyst Eric Bleeker discusses Apple Inc. (NASDAQ:AAPL). In a recent Morgan Stanley (NYSE:MS) research report, the firm outlined scenarios under which a cheaper iPhone could affect the company. Morgan Stanley proposed that Apple Inc. (NASDAQ:AAPL) selling a lower-priced iPhone with 40% gross margin and one-third cannibalization would be an incremental opportunity for the company. As Eric notes, such a gross margin would be lower than current iPhones — as expected — but would be higher than the overall company total last quarter. The most attractive market for a cheaper iPhone could be markets like India, which is set to surpass China’s growth in coming years and where lower-cost Samsung phones now prove more popular.
However, Eric says the most interesting part of Morgan Stanley research was that Apple Inc. (NASDAQ:AAPL) should be paying out 67% of its free cash flow; that’s equivalent to the tech sector average in the S&P 500. If Apple paid out 67% of its cash flow, that’d be a whopping 6% dividend yield!
There aren’t many comparables for that level of payout. Cisco Systems, Inc. (NASDAQ:CSCO) has targeted paying out 50% of its cash flow and has been applauded for its recent dividend increases, which have it yielding 2.7%. Likewise, while Microsoft Corporation (NASDAQ:MSFT) has been aggressively buying back its shares for over a decade and yields 3.3%, it paid out just 44% of its free cash flow last year.
At 67% of its free cash flow paid out, Apple Inc. (NASDAQ:AAPL) would incur additional taxes for overseas earnings if it doesn’t take on debt, a move it’s loathe to do. As Eric notes, sometimes you have to learn to walk before you run, and investors are putting extremely high expectations on Apple to pay dividends or buyback shares. In the end, Eric recommends a more moderate course of accelerated buybacks now and paying out almost all United States cash flow as dividends, a move which could put Apple Inc. (NASDAQ:AAPL)’s yield closer to 4% — well above Cisco or Microsoft.
The article Is Apple a 6% Dividend Stock? originally appeared on Fool.com and is written by Eric Bleeker, CFA.
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