One of the top Wall Street analysts covering Apple, Morgan Stanley’s Katy Huberty, had a meeting with Apple CFO Peter Oppenheimer on Thursday. And as communicated in a note to her clients afterward, she got the impression Apple is going to make an iPhone that could better appeal to the lower end of the mobile market, and double the existing dividend it’s already offering in an attempt to return some of its $137 billion in cash to shareholders.

On an iPhone mini (via AppleInsider):

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.

She noted that demand for the iPhone 4, Apple’s current low-end handset offering, was surprisingly strong during the December quarter. With a gross margin of 40 percent and a one-third cannibalization rate, she believes a so-called “iPhone mini” would drive incremental revenue and gross profit.

Cook said at an investor conference last week that Apple doesn’t try to hit a particular price point with its products. Referencing the practice of discounting older models, he said the company is ”making moves to or have made moves to make things more affordable” when it comes to the iPhone. It’s not really a confirmation they’re working on a lower-cost iPhone, but it’s not a denial either. And there’s no indication of when such a device could arrive.

On giving investors more money via a larger dividend (via Fortune):

“Our analysis,” [Huberty] writes, “suggests Apple can match the S&P IT sector’s average FCF [free cash flow] 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.”

Currently Apple offers a 2.3 percent dividend, or $2.65 per share, per quarter. But it’s clearly going to have to do something to fend off the attack from Einhorn — and his unconventional proposal for a class of stock that pays a permanent dividend — and other vocal campaigns for some of that cash. Cook has promised Apple is in “very active discussions” over what to do with its cash. Its annual shareholder meeting is coming up next week, and it seems not unlikely at all that an increase in the dividend would mollify most investors and perhaps give the stock a needed bump upward.

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While playing the “Steve would never do that” game is seldom a great idea — it’s akin to calling yourself a fortune teller or a mind reader — it is fairly safe to say, based on his prior statements and declarations, that Steve Jobs chose a successor who is not afraid to do things differently than he would at Apple. After years as the company’s COO, Cook has been Apple’s chief executive officially since August, and in that short time he’s done a number of things that represent a different direction for Apple as a company and its culture — instituting a generous charitable contribution matching program, engaging more with investors and publishing detailed audits of its international manufacturing plants, to name a few.

On Monday, he made his mark on the company in a bold new way when he announced Apple will begin a dividend payment for shareholders of $2.65 per share starting in July. Apple will also spend $10 billion to repurchase shares of its stock over the next three years. Both of these things were done to answer the prickly question of what Apple would do with its giant pile of cash — which at $98 billion as of December is sure to grow even larger after this quarter’s launch of the new iPad.

Charting his own path

Cook answered this question by breaking with his predecessor. To understand how Cook thinks and how he differs from Jobs, we need only look at what Jobs has said in the past on this very topic. At a shareholder meeting in February 2010, when asked about a dividend Jobs very clearly laid out his opposition to one and why he feared not having access to cash:

“Cash gives us tremendous security and flexibility. When you take risks, it’s like jumping up in the air, and it’s nice to know the ground will be there when you land,” he told the group. “We run our company conservatively from a financial point of view because you never know what opportunity is around the corner…We’re very fortunate that if we needed to acquire something we could write a check for it and not have to borrow money.”

Jobs also rejected the idea of giving stockowners more of that cash through dividends because, he said, he believed the stock price, currently at $201.60 a share, would be unaffected either way. He asked one shareholder, “Would you rather be a company with our same stock price and $40 billion in cash, or a company with the same stock price and no cash?”

The conservatism stems from Jobs’ fear of putting Apple in the situation he found it in when he returned in 1997: a few weeks from bankruptcy. But what he also intimated in that explanation is that beyond fear of going into debt, he wanted the flexibility to acquire companies, or to make gigantic pre-payments of touchscreen displays or flash memory: risks that Apple likes to take to ensure its ability to meet demand and simultaneously squeeze out competition in the supply chain.

Of course, that’s when Jobs was looking at $40 billion and a stock price of $200. Who’s to say that Jobs wouldn’t have entertained a dividend seriously when seeing the data that Cook is looking at: cash of almost $100 billion, stock hovering around $600, and a company that is the largest in the world, valued at $555 billion? Jobs was famous for his forceful opinions that sometimes conflicted with reality, but, as his biography pointed out, he could also be quick to change his mind (see video iPods, the iBookstore, the iPad, etc).

Jobs was known for his extremes, but Cook and his CFO Peter Oppenheimer found a middle road: a way to satisfy Wall Street’s criticism of its too-large cash hoard, but in a manner that allows the company to stay flexible. After the dividend and share repurchase Apple will still have around $50 billion in cash in 2015 — in addition to, as Horace Dediu as Asymco points out, whatever it continues to add to its cash reserves over the next few years — and Microsoft, for example, has around $50 billion in cash and they don’t worry about having cash.

Notably, the $2.65 per share dividend rate Cook and Oppenheimer selected amounts to a 1.81 percent yield at the current stock price. And as The Wall Street Journal points out, that isn’t that high even among its tech company peers: AT&T’s dividend yield is the highest at 5.61 percent, followed by Verizon at 5.09 percent and Microsoft at 2.42 percent. Even lower than Apple is Cisco with 1.6 percent, IBM with 1.51, Oracle with 0.81 percent and Google, who has never issued a dividend.

A dividend doesn’t mean it’s done growing

So does this mean Cook is being careless or bearish on Apple’s future growth prospects? It would seem not.

At the beginning of the conference call with Apple investors and the media Monday morning, before even uttering the word “dividend,” Cook took pains to explain the growth opportunities he sees for Apple, and stressed how confident he is in the company’s future. As he did during a recent investor’s conference, Cook reiterated that despite selling 37 million iPhones between October and December, that total made up just 9 percent of all handsets sold in the world. The number of handsets “is expected to grow to 2 billion in 2015,” he said. “The potential for iPhone is enormous.”

He repeated something similar about the iPad, about how it will eventually surpass the PC market in size. HE talked about how the Mac, despite holding a 6 percent share of the PC market, continues to grow at a higher rate than the entire PC market. He reminded investors that Apple is opening 40 new stores in 2012.

The subtext? We’re not a company that’s done growing, and we’re not out of ideas, two of the most common worries about Apple in the post-Jobs era. A lot of times issuing a dividend signals that a company’s investment opportunities are better than its prospects for growth. Apple is very clearly not saying that. It’s saying that it had to do something with its cash, and Cook made the call on what to do.

His decision is different than what we might think Jobs would have done, but Cook also assured that this move to spend $45 billion is not a complete break with the established Apple way. On Monday he said that even with the share repurchase and dividend, the company still has plenty of cash, which they will use on the same things they always have: research and development, opening new stores, strategic expenditures in the supply chain and making acquisitions. “There will be more of all of this in the future,” Cook reiterated. “These decisions will not close any doors for us.”

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Apple will also spend $10 billion of its nearly $100 billion in cash to repurchase shares of its stock over a period of three years, which is currently priced at $585.57 per share. That will begin with the company’s 2013 fiscal year, which is September 30, 2012. The purpose of that is to, neutralize ”the impact of dilution from future employee equity grants and employee stock purchase programs,” Apple said in a press release Monday morning.

All told, the company will spend $45 billion over the course of the next three years.

We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure. You’ll see more of all of these in the future. Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program.

Apple is holding a conference call with investors to discuss the dividend and buyback at 6 a.m. PDT. We’ll be updating this post throughout the event.

Update: On a conference call Monday morning, Cook said that despite spending a large amount of cash on dividends and repurchasing stock, the company will continue to use its cash on the same things it has up til now, including research and development, retail store openings and strategic capital expenditures in the supply chain. “There will be more of all of this in the future,” he said.

Cook added:

Even with these investments we can mainstain a war chest for strategic opportunities and have plenty of cash. We have thought very deeply and very carefully about our cash balance. We will continue to invest in the business … these decisions will not close any doors for us.

Other topics discussed:

• Cook said that Apple’s board of directors considered other scenarios, including a stock split. But he said that they ultimately decided against it because they saw “little support that it helps the stock.” He did say that Apple is “in a unique position at a unique point in time” so that a split is something they would “continue to look at.”
• As of the end of December 2011, $64 billion of Apple’s $98 billion in cash was held in accounts outside the U.S. The cash being used to pay for the dividend and buyback is coming from the cash Apple currently has in U.S.-based accounts. CFO Peter Oppenheimer repeated what he’s said before, that “repatriating the cash from offshore would result in significant tax consequences.”
• They had no interest in talking about anything other than cash, but in response to an analyst’s question about whether Apple planned to release sales figures for the new iPad, which went on sale this weekend, Cook said that the tablet had a “record weekend and we’re thrilled with it.”

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• Apple has almost $100 billion in cash now.
• Cook told investors and reporters late last year he wasn’t “religious” about holding cash, a subtle but important difference in the attitude Steve Jobs has long had about Apple’s cash holdings.
• CFO Peter Oppenheimer shared several weeks ago that the company is “actively discussing” what to do with all that money.
• People who could be in a position to know are starting to talk openly about it.

A UBS analyst says Apple has been soliciting opinions from investors on what to do with the money. We all know what investors want Apple to do:  give it back to shareholders.

And on Monday, Fortune editor Adam Lashinsky, author of the just-released (and excellent) Inside Apple, writes that we should expect to hear about AAPL owners getting a dividend “sooner rather than later.” As someone who’s demonstrated he knows a thing or two about what goes on inside 1 Infinite Loop, this is yet another good indication Apple is thinking differently about its money these days. As Lashinsky points out, what else will they do with it?:

[W]hat’s becoming increasingly clear is that Apple has a success problem on its hands: It has run out of ways to responsibly spend its profits. It has never done what any other big company would view as a major acquisition. Silicon Valley investment bankers desperately would like to see Apple acquire Twitter, for example. But this would be so contrary to the Apple acquisition mindset that it’s hard to imagine.

Apple’s annual shareholder meeting is coming up on February 23. These kinds of meetings can be somewhat of a snooze. Perhaps this year edition will have a few fireworks.

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Sterne Agee’s Shaw Wu has one of the more conservative estimates of Apple’s performance but still increased his firm’s price target to $550 from $540, citing the possibility of an impending iPad launch as a reason to trust in the stock’s strength:

For its outlook, AAPL guided above consensus, which is rare for a company known for its vintage conservative guidance. For the March quarter, the company is looking for $32.5 billion in revenue and $8.50 in EPS vs. consensus at $32 billion and $8.03 in EPS. While AAPL does not pre-announce future products, we believe this guidance implies that there could be an iPad update in the quarter, which is consistent with what we have been seeing in our supply chain checks.

Brian White of Ticonderoga Securities was far less conservative, raising Apple’s stock price target to $666. He talks about how Apple “crushed” Ticonderoga’s previous projections with its results in a note released on Tuesday evening, and he argues that Apple has room to run:

[T]his is clearly a quarter to remember and speaks to the momentum at Apple that we believe has further room to run, ultimately driving the stock to our 12-month price target of $666.

Canaccord Genuity’s Michael Walkley also raised his target beyond the $600 mark, increasing it to $650 from $560. He anticipates that Apple’s results might prompt the company to change its policy on paying dividends (via Forbes):

We believe Apple is likely to announce a dividend during 2012, potentially next quarter when crossing $100B in cash and cash equivalents.  We view this as very bullish for investors, as we believe a new group of investors seeking dividends would invest in Apple and drive shares higher.

Deutsche Bank also raised its estimates, putting Apple’s new target price at $600. Analyst Chris Whitmore said in a note to investors (via StreetInsider) that his firm also expects additional gains from a new iPad release:

[W]e expect iPad 3 in C1Q12 followed by an iPhone 5 refresh in the Fall. In addition, we expect Macs with Ivy Bridge should support incremental share gains and Apple TV appears set to graduate from an ‘Apple hobby’ later this year.

The list is much longer, of course, and Apple’s stock performance in early trading on Wednesday reflects the general optimism: As of this writing, it was sitting at around $447 per share, up $26.60 from Tuesday’s close.

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However, Cisco’s news had that tipping-point feeling to it: Would Silicon Valley — where the rule of thumb had always been high-tech equals low-dividend — start to pay more dividends? Cisco’s news came on the same day that Microsoft said it would increase its dividend from the current 52 cents a year, even if it meant taking on new debt. In other words, Microsoft was willing to pay interest so that it could pay dividends.

That reignited a debate over dividends. Some asked whether it was bad news for investors. Others thought it was a good thing. But it echoed the debate over dividends that has continued for decades. On one hand, shareholders are a company’s owners, so they’re entitled to a portion of the profits. On the other hand, profits are better plowed into creating more profits, which can enrich investors by increasing the stock’s value.

The anti-dividend sentiment prevailed in Silicon Valley simply because, since the late 1970s, tech companies have largely been growth stocks. During the dot-com boom, the notion grew even more deeply entrenched, but as IT spending remains stagnant, the idea of tech dividends suddenly doesn’t seem so absurd. There are a lot of reason why, but two stand out: Tech giants are hoarding cash, and tech giants have very cheap P/E ratios.

Cisco provides an excellent example of both trends. Cisco’s revenue grew 11 percent last year and is expected to maintain that rate this year. Its operating margins are steady around 20 percent. So, while it’s a maturing company, it’s maturing with impressive growth. Yet the price-earnings ratio has been hovering around 16, below the 20.6 ratio for the S&P 500. Other tech giants have been trading cheaply for some time as well, such as Intel, Hewlett-Packard (11) and Microsoft (12).

Meanwhile, these companies have amassed vast piles of cash. Cisco has $40 billion in cash on hand. A 2-percent dividend would cost it about $2.5 billion, or 6 percent of the total. Microsoft has $37 billion. Much of this money is overseas, and subject to currency losses if the dollar gains. The chart from Ycharts shows the different trajectories taken by Cisco’s P/E ratio and its cash on hand.

In the past, tech companies have used cash to expand operations through organic growth or acquisitions, but few want to expand organically when the forecast for IT spending is looking uncertain at best. Some are concerned that cash-fueled M&A activity has been artificially inflating the value of acquired companies; the huge premium paid for 3Par by HP offering is a good example. That creates a nice payout for startup founders, but it doesn’t make investors very happy.

Until tech stock prices start rising again, pressure is likely to continue from investors and analysts on tech companies to offer dividends, and once they start offering dividends, to raise them. Rather than winning praise as a large-cap tech stock offering dividends, Microsoft had been pressured to fatten dividend payments in the months before this week’s announcement.

There will be holdouts, too, such as Apple and Google, with cash hoards of $25 billion and $30 billion, respectively. Google offering a dividend to investors is as likely a scenario (albeit one more pleasant to imagine) as Eric Schmidt performing a strip tease at a shareholder meeting. Google has always made it clear it will shovel profits into more innovation.

However, if enough companies start offering dividends, it will increase pressure on others. One of the benefits of dividends is that it rewards long-term shareholders like company employees who’ve obtained stock through options packages. If they see their peers at a rival company getting a de-facto raise through dividends, they may start to speak up themselves.

But maybe it should — at least until things turn around for Google.

The question of a Google dividend first came up a couple of years ago, when it was trading around $350 a share. Back then, a former employee wondered why the stock was worth anything to investors without one. The answer for most Google shareholders was capital gains. Shares of the search giant had tripled since its IPO, and would go on to double again over the next 18 months.

But since as of Friday’s close, the stock is back down at $346, the question can be raised again: What’s the point of owning Google stock?

There are reasons to do so over the long term. Once the economy recovers, Google will be in a strong position to collect a lot of the growth in online ads. But in the meantime, there’s not a lot happening in the company’s favor. It appears to be losing market share in search, even as it faces new accusations of being a monopoly.

In better times, Google could afford to plow its profits back into newer areas that could yield growth in the future. But while it had trouble monetizing them, it believed strongly that the important thing was to let them develop naturally with proper nurturing. This year, it’s been backing off that patient approach, pulling out of radio and print ads.

But it’s still making massive profits — net income came in at $4.2 billion last year, or 19 percent of revenue. Its cash on hand has risen to $8.7 billion from $3.5 billion in two years. That’s a lot of money not going into new research and development.

Google has said time and again it’s not inclined to do any special favors for investors, but that’s not true, at least not strictly speaking. The company reset the price of stock options for employees after declines late last year left many under water. As Reuters pointed out, Google investors are unhappy about the double standard.

Any intelligent investor in Google knows the company has been clear from the start that it won’t coddle them. The biggest obstacle to Google paying a dividend is more of an emotional one — corporate pride. Dividends are what mature, aging companies pay to keep angry investors at bay. Let Microsoft pay them, but a spry, 10-year-old old company like Google won’t.

So investors aren’t likely to waste time with complaints that won’t be heard. They are more likely to switch to a tech company that has willingly paid out dividends during lean years: say, Microsoft. Given that Google doesn’t buy back shares, the selling could depress its stock further.

The fact is, Google is starting to act like an aging, mature company in slow decline. That doesn’t mean its best years are behind it, it means the company is going through something like hibernation for a few years. If the money it’s generating in tough times can’t be used to invest in its future growth, it might be better off shared with investors who are missing the heady days of capital gains at Google.

(Disclosure: I do not have any investment position, long or short, in Google.)

Chart courtesy of Google Finance.

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