Morgan Stanley analyst Katy Huberty met recently with Apple Chief Financial Officer Peter Oppenheimer. Huberty came away from the meeting with the belief that Apple will likely increase cash return to shareholders, and release a lower priced iPhone to maintain growth.
Huberty, in a note to investors on Friday, said that innovation remains a “top priority” at Apple. That’s why she expects Apple to expand the iPhone lineup, and also to introduce new services that can “unlock significant value” and drive device sales.
Noting that demand for the iPhone 4 was surprisingly strong during the December quarter, she believes a so-called “iPhone mini” would drive incremental revenue and gross profit.
“The company’s approach to product decisions and innovation has not changed in the past several years despite the CEO transition,” Huberty wrote. “Making great products remains Apple’s core strategy and the company is as confident as ever about the future pipeline of new products and services.”
Huberty also believes that Apple will likely return more of that huge cash balance Apple has on hand to the shareholders. Saying the Cupertino firm could match the S&P 500 IT sector’s average free cash flow payout of 68 percent. At that rate, Apple could return $28 billion to shareholders in fiscal year 2013. a 6% total yield on the company’s dividend.
To pay out the dividend, Apple could borrow funds. The amount of Apple’s overseas cash pile limits the company’s flexibility, but Huberty says that could be addressed by low-interest rate debt.
Morgan Stanley has maintained its “overweight” rating for AAPL stock with a price target of $630.