Increased Dividend? More Buybacks? What You Need To Know Ahead Of Apple's Next Earnings Call

Musing over what Apple Inc. AAPL might reveal on its fiscal year second quarter earnings call, due in April, RBC Capital Markets asked investors to brace for details on its capital allocation process.

In a note Friday, RBC said it thinks Apple will raise its dividend by 10-15 percent, implying yield of 2 percent, and increase its buyback authorization further.

The Case of Abounding Cash & Return of Cash

Analysts Amit Daryanani and Mitch Steves believe Apple could announce and sustain a $50+ billion annual capital allocation program, in the absence of capital repatriation, given that the company's net cash position has increased to $159 billion from $153 billion in December 2015.

While noting the company bought back shares at a rate of $6 billion per quarter over the past 12 quarters and that it has $31 billion in underutilized authorization under the current program, the firm said the company could increase the authorization by $35 billion to $40 billion, which could be used over the next six to eight quarters.

Using Up the Free Cash Flow

RBC expects the company to generate $57 billion in free cash flow in 2017 and then sustain 10 percent growth going forward. The firm assumes roughly 38 percent of the free cash flow is being generated in the U.S. and the remainder $36 billion from overseas. Accordingly, the firm sees scope for a 15 percent increase in dividend, financed by the domestic free cash flow.

The firm thinks Apple could talk about a dividend payout target as a long-term discussion and something that could be a reality under cash repatriation. Given that Apple's 25 percent payout lags the large-cap tech peers' 50 percent yield, the firm sees the company closing in on the gap, if repatriation occurs.

Attractive Large-cap Asset

RBC said Apple remains an attractive large-cap asset to own, given iPhone 8 supercycle, capital allocation & repatriation, and services growth.

RBC has an Outperform rating and $155 price target for shares of Apple.

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