Analyst: Apple’s Investors Don’t Like Secrets

Apple (NASDAQ:AAPL) needs to be more transparent to shareholders about its capital allocation plans and assure them it has their best interests in mind, Bernstein Research’s Toni Sacconaghi has said. According to the analyst, an immediate gesture of a payment in reaction to Greenlight Capital’s statement and the buzz surrounding the topic would not be enough to appease the company’s investors in the longer term.

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According to Sacconaghi, companies that have a very high and transparent use of cash, such as IBM (NYSE:IBM), have been rewarded in the marketplace despite low revenue growth. “Ultimately, we believe that the most important thing for Apple may be to be transparent that it is committed to returning cash to shareholders,” he writes in a note to clients on Monday.

The analyst suggests Apple announce it intends to return at least 50 percent or 70 percent of ongoing free cash flow to investors every year. Then, it can use a combination of vehicles, including dividends and preferred stock, and either borrow money or bring it back from overseas depending on prevailing interest rates and tax environment in order to pay investors.

The question of Apple’s big pile of cash—about $137 billion at the end of December — is colored by the fact that 70 percent of it is in international accounts, the analyst writes.

“Apple’s onshore cash is insufficient to meaningfully increase its payout … unless cash is repatriated or the company issues debt,” he writes. “For example, if Apple did issue $100 billion of preferred [stock] at 4 percent tomorrow [as suggested by Greenlight], the $4 billion in interest would more than use up U.S. cash generation unless the common dividend is cut, share repurchases halted, or Apple dips into current onshore cash.”

That’s because while Apple currently has $43 billion at home, its projected U.S.-based cash flow this year of $12.4 billion is $1 billion shy of the amount needed to cover its $10 billion in planned dividend payments and the one-third of its planned share repurchases of $10 billion, the analyst estimates.

“If Apple intends to keep issuing more preferred stock over time, it will ultimately need to find a vehicle to bring more cash onshore, otherwise a preferred issuance risks being viewed by investors as a one-time item,” he adds.

Sacconaghi, who has an Outperform rating and a $725 price target on Apple, also recognizes the transformation in the company’s shareholder cohort from growth funds to more value funds.

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