Analyst: Apple Needs to be Less Stingy

The percentage of Apple’s (NASDAQ:AAPL) projected total return to shareholders versus its huge cash holdings is much below average for technology companies, according to Morgan Stanley analyst Katy Huberty.

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Apple’s projected return of free cash flow of 36 percent, which includes dividends and stock buybacks, is well below the average of 68 percent for IT companies in the Standard & Poor’s 500, Huberty writes in a research note, according to Barron’s.

Raising it to average industry levels would lead to a 6 percent yield for investors, she calculates, amounting to $28 billion annually. Apple currently has plans to return $45 billion over three years, which comes to an average $15 billion every year.

Adding an additional $13 billion annually is “a viable option given our conservative free cash flow estimates assume Apple generates $21 billion of [domestic] free cash flow this year and would still end the year with $36 billion of US cash on hand,” she adds.

According to the analyst, a higher cash return from Apple would also act as a “catalyst” for the company’s share price, which has lost a third of its value since reaching record highs in mid-September. It would also draw in value investors…

“Improved cash return could draw value investors who currently own just 2 percent of Apple shares versus 12 percent ownership of large-cap IT software and hardware companies,” the analyst writes. “Growth funds lowered ownership from 45 percent two years ago to 33 percent today while value investor ownership only increased from 1 percent to 2 percent.”

An increase in stock buyback also had an advantage of boosting earnings for the company, says Huberty, who has an Overweight rating on Apple shares and a $630 price target.

Stock buybacks maintain financial flexibility and could improve fiscal year 2013 earnings per share outlook as every $5 billion adds roughly 1 percent to earning per share growth, she calculates.

Here’s how Apple (NASDAQ:AAPL) has traded in the past 5 trading sessions:

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