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Apple: Morgan Stanley Sees Higher Div, Cheaper iPhones

This article is more than 10 years old.

Morgan Stanley analyst Katy Huberty expects Apple to sharply ratchet up the amount of cash it return to shareholders.

In a research note this morning, Huberty asserts that the company can match the S&P IT sector's average free cash flow payout of 68% if it returns $28 billion to holders in FY 2013, "implying a 6% total yield." (Note that this does not necessarily mean a 6% dividend yield; this would include a combination of dividends and share buybacks.) She notes that a high mix of international cash limits the company's flexibility, but that the company can address the issue by issuing low-interest debt. (An idea that Bernstein analyst Toni Sacconaghi recently floated, I would note.)

At the current rate, AAPL has a dividend yield of 2.3%; including buybacks the total yield is about a percentage point higher.

In a short but wide-ranging report following meetings with CFO Peter Oppenheimer, Huberty made several other observations about Apple's business:

  • She notes that there are "several signs" that introducing a lower price iPhone "makes sense." The iPad mini is expanding Apple's customer base with 50% of purchases in China and Brazil representing new customers to the ecosystem. China customers prefer current generation phones rather than discounted older phones, she adds. Also, iPhone 5 sales "surprised to the upside in the December quarter. "Even at a low 40% gross margin and one-third cannibalization rate, we see an iPhone Mini as incremental to revenue and gross profit dollars."
  • Huberty also contends that expanded services are "key to unlocking value." She contends that with the 500 million installed base of iTunes and App Store accounts, the company "has the opportunity to introduce new services that drive increased device sales, customer stickiness, and/or new revenue streams."
  • Finally, she adds that the company's innovation pipeline remains robust. "The company’s approach to product decisions and innovation has not changed in the past several years despite the CEO transition," she writes. "Making great products remains Apple’s core strategy and the company is as confident as ever about the future pipeline of new products and service."

AAPL this morning is up $2.94, or 0.7%, to $449.