AAPL Rising: Morgan Stanley Sees Higher Payout, Tilson Lauds ‘iPrefs’

Morgan Stanley’s Katy Huberty, and hedgie Whitney Tilson, both weigh in today on David Einhorn‘s conference call yesterday to discuss with Apple (AAPL) shareholders his proposal that the company issue perpetual preferred shares of stock with a 4% dividend, something he calls “iPrefs,” and which he billed in his presentation as “the product Apple doesn’t yet know it needs” to lift its stock’s valuation.

The transcript of Einrhorn’s presentation, along with his slides, is here.

Apple shares today are up $3.24, or 0.7%, at $449.30.

Huberty, reiterating an Overweight rating on the stock and a $630 price target, doesn’t directly address Einhorn, but rather remarks simply:

Apple could return more cash to shareholders given its cash balance is $40B higher vs. March 2012. Our analysis suggests Apple can match the S&P IT sector�s average FCF payout of 68% if it returns $28B in FY13, implying a 6% total yield. High mix of international cash limited flexibility in the past but raising low-interest debt can help address this issue, in our view.

Huberty also adds that she sees Apple being helped by a lower-cost iPhone:

We also see several signs that a lower priced iPhone makes sense: 1) iPad Mini is expanding Apple�s customer base with 50% of purchases in China/Brazil representing new customers to the ecosystem. 2) Chinese consumers show a desire to purchase the latest version of iPhone (instead of discounted older generations). 3) iPhone 4 demand surprised to the upside in the December quarter. Even at a low 40% gross margin and 1/3 cannibalization rate, we see an �iPhone Mini� as incremental to revenue and gross profit dollars.

Tilson is thrilled with iPrefs:

I think iPrefs are a brilliant idea that uniquely works for Apple, given its enormous pile of cash (�that exceeds the market capitalization of all but 17 companies in the S&P 500� � incredible!), huge cash flows, yet depressed multiple. By creating a dedicated high-yield instrument in this yield-starved environment, iPrefs would unlock a lot more value than more traditional techniques like a special dividend and/or an increase in the dividend and/or share repurchase program. There aren�t a lot of companies in Apple�s particular situation, but I confidently predict that, whether or not Apple adopts this idea, other companies will.