Analysts to Apple: Bend your knee to Wall Street

Jan 25 2013, 10:40 IST
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Sell-off put Apple a hair's-breadth away from losing its status as the world's most valuable company. (Reuters) Sell-off put Apple a hair's-breadth away from losing its status as the world's most valuable company. (Reuters)
SummarySell-off put Apple a hair's-breadth away from losing its status as the world's most valuable company.

of the iPod, iPhone and iPad. In doing so, the company left investors with the expectation of perpetually zooming growth.

Now, Apple looks quite different. It's still massively profitable, but its growth is moderate, making it similar to companies like IBM Corp. and Microsoft Corp.

“The company is at a bit of a crossroads,'' said Nomura Securities analyst Stuart Jeffrey. “It's gone from launching big hit products where they didn't have to look at the competitive landscape _ they just did their own thing _ and the growth meant they didn't have to focus on the whims of Wall Street.''

The problem, Jeffrey said, is that Apple hasn't adjusted to this reality and worked to find new constituencies among investors. Those who invest in fast-growing companies or chase rising stocks have abandoned the company. Apple doesn't do enough to attract other investor types: value investors who seek out the stocks of undervalued companies with steady, predictable profits, and income investors who look for stocks with generous dividends and low risk.

Analyst Brian White at Topeka Capital Markets said the lack of interest from value-oriented investors means Apple lacks a safety net when there's disappointing news, like Wednesday's earnings report. When other companies' stocks fall, value investors tend to swoop in, putting a floor under the stock and dampening volatility.

“No one wants to pay anything for (Apple) because you can't get the value investor to back it up,'' White said.

Apple sits on a cash pile of $137 billion, which currently earns about 1 percent annual interest. It's a hoard that frustrates many company-watchers, and analysts are virtually unanimous in their opinion that Apple should be putting it to better use.

Apple has taken steps in the right direction, as far as Wall Street is concerned. Last year, it instituted a quarterly dividend of $2.65 per share, a generous sum compared with most technology companies. But it's paltry when measured against companies with similar cash reserves. It has also started using cash to buy back shares _ another way to reward investors.

But analysts say the company should be doing more. Jeffrey calculates that Apple will generate about another $103 billion over three years, but has only committed to returning $45 billion of this $240 billion in cash to shareholders.

“The company needs to change strategically in a number of ways... including in looking after shareholders,'' Jeffrey said.

A higher dividend would appeal to value and income investors, and buybacks

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