Does Apple Think Its Stock Is Cheap?

Apple CEO Tim Cook poses with an iPad Mini on Oct. 23, 2012 in California

Photo by KIMIHIRO HOSHINO/AFP/Getty Images

Gina Chon claims that, “according to sources,” Apple will announce an increased dividend or share buyback program this spring, pre-empting criticism from David Einhorn and others that it’s not doing enough to return cash to shareholders.

That sourcing is a bit hard to interrogate. But if Apple does decide to disgorge some cash, it seems to me that a share buyback is much more likely than a dividend. The reason is simple: By any conventional metric, Apple stock is very cheap right now. That doesn’t mean Apple’s a good buy. The cheapness may well illustrate warranted pessimism about the company’s future. If you think that Samsung is going to eat iPhone’s lunch over the next three years and Google Glass will be the next big thing, then Apple’s super-low price:earnings ratio is no reason to buy the stock. But presumably Apple executives don’t think Samsung is going to wreck the iPhone business or that Google Glass is the next great disruptive consumer electronics product. And there’s no getting around the fact that Apple stock is cheap right now. If you’re even moderately optimistic about the company, then buying AAPL looks like a great buy right now.

If Tim Cook doesn’t see any large acquisitions out there right now that make sense, then acquiring shares in Apple itself is going to look like a solid bargain, and that’s what the company will probably do.

All that said, it’s far from obvious to me that Apple actually will do what Chon says. Nobody is really in a position to force Apple management to pay cash out to shareholders; the huge stockpile of cash is a nice cushion for management; and the plan of hoping Congress enacts a corporate tax break of some kind in the near future seems reasonable enough to me.