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Apple’s Giant Portfolio (and Tiny Yield)

Apple (AAPL) earns enormous returns on the capital it invests to design and sell phones, computers and other gadgets–more than 40% over the past year, according to FactSet.

But like most cautious savers, it earns puny yields on its portfolio of money market shares, certificates of deposit, government and high-grade corporate bonds and the like.

Unlike most savers, Apple has cash and investments of $97.6 billion, up from $81.6 billion just one quarter ago, the company reported Tuesday. If it were a mutual fund, it would be America’s sixth-largest.

Apple pulled down a profit of $13.1 billion in its quarter ended Dec. 31, making a mockery of Wall Street’s $9.6 billion forecast. Almost all of it came from operations. Just $137 million is listed as “other income”. Assuming all of that is interest, Apple’s mighty portfolio is yielding about 0.6% a year. That’s not even enough to cover inflation, which reduced the buying power of investment portfolios by 3% over the past year, according to U.S. government data.

This raises the question of whether Apple can do something more profitable with its treasure. Spending it all is almost out of the question. In the company’s annual report, issued in October, it projected a near-doubling of so-called capital expenditures–spending on things like stores, corporate facilities and data centers–to $8 billion. But analysts expect the company to produce $41 billion in free cash this year, even after capital expenditures.

Acquisitions seem unlikely to make much a difference, either. Apple has enough cash and investments to buy all but 26 publicly traded U.S. companies, including Hewlett-Packard (HPQ) twice or Dell (DELL) once. But there’s little to suggest it would be interested in a large deal. Its recent buyouts have been measured in the millions of dollars, not billions.

That leaves a dividend or share repurchases looking likely. Michael Walkley, an analyst with Canaccord Genuity, says the company will probably announce a dividend this year. “A new group of investors seeking dividends would invest in Apple and drive shares higher,” he said in response to the company’s Tuesday earnings report.

To his point, dividend-paying stocks outperformed in 2011, an otherwise flat year for the market, as investors, faced with a 10-year Treasury yield of around 2%, searched for more income. Companies seem keen to cater to investor demand.  Among S&P 500 members (of which Apple is the largest by stock market value) 320 boosted their dividend payments last year and 22 initiated payments, according to Standard & Poor’s.

The median dividend-paying company in the S&P 500 index spends about 30% of its profit on payments.  If Apple paid that much, it would have a dividend yield of 2.8%, versus around 2% for the broader 500 index.

Share repurchases have been surging, too (see “Profiting from Stock Buybacks”) . They reduce the outstanding share count, thereby increasing earnings per share, convincing investors, in theory, at least, to pay more for individual shares.  Apple shares, despite a 30% gain over the past year, sell for a slight discount to the broad market relative to the company’s earnings.

Whatever the company decides, most of its riches will likely stay put for now. As of Sep. 24, 2011, Apple has more than $54 billion held overseas. The figure is likely higher now. These funds are subject to taxes upon repatriation into the U.S. If Apple would pay, say, 25% in corporate taxes, and if many investors would pay a further 15% in dividend taxes, then Apple might assume, rightly, that it can earn a better “return” for stockholders by sitting on these funds for now and pressing Congress for a repatriation holiday.

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    • Apple shares aren’t quite the super sexy stuff they once were; starting to slowly become another MSFT.

    • It would be better if they announced a stock split

    • Trust me on this… Apple is NOT going to announce a dividend.

      Dividends are for companies that no longer innovate and that is not where Apple is right now.

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