Apple Inc. (AAPL), highlighted as one of the biggest beneficiaries of the Republican tax overhaul, should significantly increase its capital return to shareholders, according to one team of analysts on the Street. (See also: 3 Reasons Why Apple's Shares Will Outperform.)
“We see Apple substantially increasing its capital return program given the incremental cash provided from U.S. tax reform and Apple's pledge to reduce its net cash position to zero over time,” wrote analysts at Longbow Research. Longbow's Shawn Harrison issued a note to clients Friday in which he indicated that the smartphone maker could double its dividend and still have its payout level in line with its large technology competitors.
The Cupertino, California-based tech titan currently pays out just 26% of its free cash flow (FCF) to shareholders, compared to the average for its large-cap technology peers at 43%, noted Harrison. He indicated that if Apple lifts its dividend by 100%, it will be left with more than $40 billion per year in FCF to buy back its stock for fiscal 2019.
Regardless of a forecast boost in capital returns, Longbow maintains a neutral rating on AAPL, highlighting concerns over a weaker-than-expected iPhone business and the fact that near-term positives, such as services growth and accelerated capital, are already priced into the stock.
Earlier this year, analysts at UBS issued a note forecasting the smartphone maker to see gains accelerate as it accesses new funds, thanks to the GOP tax plan. In December, lawmakers passed Trump's tax overhaul that reduced the corporate tax rate by 35% to 21% and incentivized America's most powerful corporations to bring back billions in cash hoarded overseas in more tax-friendly jurisdictions. UBS expects overseas cash repatriation to allow Apple to buy back $122 billion worth of its shares through 2019, boosting its dividend yield to 3% from 1.6% over the next six years. As the company plans to become "cash neutral" after generating a record cash pile of $285.1 billion, UBS analyst Steven Milunovich expects Apple's earnings per share (EPS) to jump as much as 30% above current estimates and its stock to rise 8.7% over 12 months to $190.
Closing up 0.3% on Friday at $174.73, AAPL reflects a 3.3% gain year-to-date (YTD) and a 23.9% increase over the year, compared to the broader S&P 500's 0.7% decline and 14.1% return over the same respective periods. (See also: Do Tech Stocks Face a Heavily Regulated Future?)