Analyst: Here’s How To Solve Apple’s Money Problems

While bringing its large amounts of overseas cash back to the U.S. in order to return more money to shareholders will be costly, Apple (NASDAQ:AAPL) has enough in the bank at home to increase dividend, according to RBC Capital Markets’ Amit Daryanani.

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In a note to investors on Friday, Daryanani was responding to the buzz surrounding Apple’s $137 billion in cash reserves, with several watchers, led by David Einhorn, eyeing the big dollars. Thursday’s comments from Greenlight Capital’s Einhorn about Apple’s dividend and stock strategy got the company to respond with a statement that it was considering increasing returns to shareholders.

According to the RBC analyst, about 70 percent of Apple’s cash balance was held overseas, which meant that at a corporate repatriation rate of 35 percent, the company stood to lose about $33 billion. While such a scenario was possibly unacceptable for Apple, he pointed out that the iPhone maker also had $43 billion in cash domestically. In addition, the company was expected to generate another $45 billion in free cash flow this year, giving it enough room to return additional cash to investors.

“If the company were to double the annual dividend to $21.20, this would imply a $20 billion distribution or 15 percent of total current cash balance,” he wrote. “Notably, we expect Apple will generate $45 billion of free cash flow in fiscal year 2013 so the payout would imply 44 percent of its free cash flow.”

The analyst added that an increase to a higher than 4 percent dividend would get Apple’s stock moving upward in the near term. Daryanani, who has an Outperform rating and a price target of $600 on Apple, said he expected the company to make an announcement regarding dividend after its annual shareholders meeting on February 27.

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“Given Apple’s history of announcing products and changes to capital allocation policy through company-specific events, we believe any change to capital allocation policy would likely occur in the March time frame after the annual shareholder meeting,” he said. Last year, Apple announced its dividend and buyback on March 19.

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