Apple Dividend: Fueling New Highs (Update 1)

Tickers in this article: AAPL BRCM QCOM SWKS TXN

Updated from 12:18 p.m. EST to provide comments from J.P. Morgan in the ninth and tenth paragraphs.

NEW YORK (TheStreet) - Apple's decision to announce a share buyback and dividend on Monday will push shares to new heights, say analysts.

Although a dividend was largely expected, the Cupertino, Calif.-based company also announced a $10 billion share-repurchase program before market open. Apple said it expects to spend $45 billion over the next three years in dividends and buybacks.

FBN Securities analyst Shebly Seyrafi raised his price target to $760 from $730, on the basis of Apple's expanding investor base. "These actions will expand the pool of investment funds that can invest in the name, so are positive for the stock. The $10B stock repurchase plan, over three years, seems a bit low for now. However, we believe that it is an initial step and it could expand substantially in the future," Serafyi wrote in his research note. He rates Apple shares "outperform."

Others analysts added that the dividend yield was better than Wall Street was expecting. Piper Jaffray analyst Gene Munster noted that "the Street was expecting around 1.5%." At Friday's closing price, Apple's dividend yield would be 1.8%.

Munster said that Apple would be paying around $10 billion in dividends per year at the current rate, but would be adding net cash to their U.S. cash holdings. Apple intends to pay for the buyback and dividend using cash based in the U.S. to avoid tax consequences.

"We estimate that Apple will generate about $70 billion in operating cash flow in FY13, 40% of which we estimate will be from the US," Munster wrote in his research report. Excluding the dividend/buyback, Apple should still generate between $11 billion - $13 billion in US cash in FY13." He rates Apple "overweight" with a $718 price target.

Apple CEO Tim Cook said that, despite the massive investments the company has made in R&D and infrastructure, Apple can also initiate a dividend and buyback. "These decisions will not close any doors for us. This will broaden Apple's investor base by attracting more investors who do not currently hold Apple's stock," Cook said on the conference call. Apple also noted that the company will review its dividend and repurchase plans periodically.

Jefferies analyst Peter Misek wrote that he did not expect the buyback, but sees the new cash strategy as very positive for the stock. "The large market cap is one of the major hindrances to further upside, and this announcement will allow dividend investors to get involved," he explained. Misek also noted that he expects dividend increases in the future, as Apple periodically revisits its dividend policy. The analyst rates Apple shares "buy" with a $699 price target.

J.P. Morgan analyst Mark Moskowitz wrote that he expects Apple shares to climb higher in the coming days based on the announcements. He notes that Apple paying a dividend is not a sign the high-growth days are over, but rather a product of the "major cash flow generation power that is attached to Apple's high-growth operating model."

He went on to write, "Apple's ability to monetize its innovation and strategically invest in the supply chain has underpinned above peer revenue, earnings and cash flow growth, which has lifted the stock in recent years. We think the dividend and buyback likely give another boost to the stock." Moskowitz rates Apple "overweight" with a $625 price target.

On the conference call, Apple CFO Peter Oppenheimer said, "We want to achieve several objectives - we want to extend the attractiveness of Apple to a wider investor base." Oppenheimer also said that none of Cook's unvested RSUs (restricted stock units) would participate in a dividend. Cook was granted 1 million RSU's in early 2012.

Apple will initiate a quarterly dividend of $2.65 per share in the fourth quarter of 2012. Apple last paid a dividend to shareholders in 1995, prior to Steve Jobs' return to the company in 1997.

Apple did not discuss any product initiatives during the call, but Cook noted that the new iPad had a "record" launch over the weekend. The new iPad features chips from companies such as Qualcomm , Broadcom , Skyworks Solutions and Texas Instruments .

Shares of Apple are higher in Monday trading, up 2.25% to $598.82.

Also:

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The 10 Worst of the Worst in 2012

--Written by Chris Ciaccia in New York

>To follow the writer on Twitter, go to http://twitter.com/commodity_bull.

Tickers in this article: AAPL BRCM QCOM SWKS TXN