Dividend Increase Fuels $AAPL Rally to $455 - Here's Why

$AAPL CashRenewed talk of a dividend increase pumped some life into shares of Apple Inc., pushing the stock above US$455 for the first time in weeks. After talking to six analysts on the topic, Bloomberg reported that Apple was likely to boost its quarterly dividend to $4.14 per share, a 56 percent increase.

Much speculation, prognostication and anticipation has centered on Apple's plans for its vast cash hoard, which stood at $137 billion at the end of the December quarter. That's a lot of money, and Wall Street wants Apple to get more aggressive about getting that money into the hands of its shareholders.

Apple CEO Tim Cook has repeatedly said that his company's board of directors has been in active discussion on the issue. In 2012, Apple initiated a three year, $10 billion stock buyback program, as well as a $2.65 per share dividend that returns an additional $10 billion per year.

That amount was certainly a first step, but the reality is that Apple is generating more than $10 billion in additional cash every quarter. That means Apple's overall hoard continues to grow even with the two programs already introduced.

In January, Apple was sued by Greenlight Capital. The hedge fund's head honcho, David Einhorn, wants Apple to release a new class of preferred shares that would pay an addition dividend, and his suit was intended to block a management-backed shareholder proposal that would have made it harder for Apple to issue such shares.

Mr. Einhorn hasn't been alone in pressuring Apple to step up its cash return efforts, either, and at this point it is widely assumed that Apple is going to do just that. On March 11th, Howard Ward of Gamco told Bloomberg that Apple was likely to announce new plans by the end of April. Mr. Ward made a similar pronouncement ahead of 2012's dividend plan, adding considerable weight to his opinion.

Enter Monday's Bloomberg report. The six analysts interviewed said that Apple would raise its dividend to between $3.31 and $5.30 per share, for an average increase to $4.14 per share. As noted above, that would be a 56 percent increase and it would make the projected 3.7 percent yield higher than 86 percent of the S&P 500 that pays dividends.

The reality, however, is that Apple could instead choose to launch a more aggressive stock buyback program. With $AAPL 35.1 percent off its closing high of $702.10 set on September 19th, 2012, a great case can be made for this kind of move. Fewer shares on the market will raise the stock price, which benefits shareholders just as much as a higher dividend.

It's most likely that Apple's board of directors would do both, just as it did in 2012. A modest increase in its dividend coupled with another $10-$20 billion in buybacks would be greeted well by Wall Street, which is why the stock rallied on renewed talk about this issue.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.