Breakout

Why Apple Investors Are Owed $30 a Share by Christmas

Jeff Macke
Breakout

With a dividend tax hike looking more likely by the day, Costco (COST), Las Vegas Sands (LVS), Dillards (DDS) and a slew of other companies have already announced plans to give sizable one-time payouts to shareholders by the end of the year. Now it's time for Apple (AAPL) to join the party.*

Related: Just How Special Are Special Dividends?

Apple has already started returning money. Back in March Apple started paying a dividend of $2.65 per share per quarter and announced a buyback of $10 billion over three years starting last September 30. By Apple's own math, that works out to $45 billion returned to shareholders over the next three years, approximately $30 billion of which in the form of dividends.

Apple has $121 billion in cash on its balance sheet, give or take a few billion. With about 941 million shares outstanding, that works out to roughly $128 per share. If Apple's cash was a free-standing company valued at 1x cash, it would have a larger market capitalization than 482 of the companies in the S&P 500.

Apple says they intend to use only their domestic cash on hand and income for repurchases and payouts. That means the roughly $83 billion held overseas is off-limits, leaving $38 billion locally. Though Apple is using cash for R&D and operations, they still added $40 billion in fiscal 2011 and are expected to tack on anywhere from $30 to $60 billion more over the next three years.

That means Apple has more money than any other company on earth and is generating cash faster than any corporation in history. They demonstrably have more money than they know what to do with; if they somehow needed more, they could issue debt for virtually nothing. There isn't a decision to be made in terms of whether or not they should issue a special dividend, it's only a question of how big it should be.

Related: Apple Could Fall Below $500 a Share: Barry Ritholtz

If Apple took all the money earmarked to pay out dividends over the next three years and paid it out now, shareholders would get $31.88 per share. If taxed at the current 15% rate, that would leave investors with $27. If that same money is paid out after January 1, it would leave shareholders in the highest tax bracket with $18 after taxes.

This has nothing to do with "fair" or the 1%. The money belongs to shareholders, and the option is either to take $27 in the next month or $18 spread out over the next 3 years. It's not a trick question; the only rational choice is to take the money now.

A company and its board are obligated to attempt to efficiently invest shareholder money. If Apple does anything other than pay shareholders a minimum of $30 per share in a one-time dividend, they are ignoring their fiduciary responsibility for reasons they can't or won't explain.

Related: Apple Backlash Hits Critical Mass But "Cheap" Stock Stuck in Limbo

The only remaining question for current Apple investors is whether Tim Cook and his BOD put shareholders' interests first. We'll have our answer by New Year's Day.

* Here's a quick primer for those of you new to the dividend conversation. The current tax rate on dividend income is 15%. Set in the Bush-era, this rate is set to expire in January unless lawmakers intervene. Under President Obama's proposed plan, dividends would be taxed inline with wages and salaries in 2013. That would mean dividend taxes will increase to as much as 39.6% for high-income earnings. With the kicker of a 3.8% additional tax on all investment income, the effective tax for dividends could be as high as 43.4% for anything paid out next year.

Faced with the choice of netting 85 cents or 55 cents on every dollar of dividend income, investors prefer the former. For the companies themselves, any cash on their balance sheets as of January 1 will be worth less than it was New Year's Eve, as far as investors are concerned.

Cash that is not needed for operations and is intended to be used for dividend payments in the future should be paid out in the next month. Those who claim otherwise are wrong.

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