Apple is rich, undervalued and ready to boost its dividend. So why the ongoing slump?

Tim Cook

Apple (AAPL) shares are off 13% this year through March 27, even as the S&P 500 Index (SPX) has climbed nearly 10% over the same period. The stock is undervalued by most standard fundamental measures and Apple optimists believe the company’s share price will get a lift when CEO Tim Cook and the board boost – as is widely expected – the iPhone maker’s dividend.

Investors such as David Einhorn’s Greenlight Capital are also pushing Cook to consider issuing $50 billion worth of preferred shares that would deliver a 5% dividend. And Covestor manager Eric Steiman thinks Apple should consider one of the following paths: a one-time $89 dividend, a double dividend, a one-time share buyback, or ongoing share buybacks.

The fundamental point behind all such recommendations: Apple can’t put its massive $137 billion-plus cash hoard to productive use and should therefore reward shareholders as growth slows. But Apple may be reluctant to share too much, given stepped-up competition from strong rivals such as Samsung, which just launched its Galaxy S4 smartphone.

Apple may boost its dividend by more than half, according to analysts surveyed by Bloomberg. (Cook reinstated dividends about a year ago after a 17-year hiatus under Steve Jobs.)  If that forecast proves accurate, the company would raise its quarterly dividend to $4.14 a share. That would in turn push Apple’s dividend yield to about 3.6% (from the current 2.34%), a level higher than 84% of the companies in the S&P 500 that pay a dividend.

Would that be enough to lift Apple shares from a tailspin that has vaporized some $225 billion from the company’s market capitalization since September? It’s now neck and neck with Exxon (XOM) for most valuable company honors.

AAPL Market Cap Chart

AAPL Market Cap data by YCharts

The reason for the share price slump now appears obvious: Apple’s once white-hot earnings growth has cooled off in recent quarters. Analysts at both Pacific Crest and Piper Jaffray have recently published reports predicting that Apple earnings next fiscal quarter will come in below expectations, thanks to soft sales of large-screen iPads and iPhones.

Also, check out this interesting chart from Bespoke Investment Group, which matches up Apple’s stock performance with Wall Street earnings estimates. The share performance has tracked earnings performance fairly closely. “Last September when AAPL was hitting all-time highs, the company was expected to earn nearly $13.50 per share this quarter,” notes Bespoke.  “As of today, it’s only expected to earn $10 per share this quarter.”

Still an Apple bull? Check out Covestor Manager Libardo Lambrano’s Dividend Paying Large Caps model. Apple is currently his portfolio’s biggest holding.

The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Photo: deerkoski