Noooooo, Apple! Don't Do A Special Dividend! Buy Back $50 Billion Of Stock!

Apple stock just popped on a rumor that the company will dig into its mountain of unneeded cash and issue a big fat "special dividend" to shareholders.

On the one hand, this is a positive: Apple should do something with the cash.

On the other hand, it's a negative: Of the three most sensible ways to return cash to shareholders, a "special dividend" is the least flexible and least efficient.

The two other options are:

• Increase in the regular dividend (perhaps at least a doubling)
• A major stock buyback

Of these two options, the stock buyback is the most efficient and flexible option.

Why?

Because of dividend taxes.

Apple's stock is owned by a lot of small, taxpaying shareholders.

These shareholders will get hit with up to a 23.8% tax on any dividends thanks to the recent tax increase.

These taxes will take a big bite out of whatever dividends Apple pays. And Apple shareholders may actually not want their cash back yet.

If Apple buys back stock, meanwhile, the cash will be returned to shareholders tax free.

Each dollar spent to buy back stock will reduce Apple's share base by a full dollar. Thus, shareholders will get a full bang for their buck.

A doubling (or even tripling) of the regular dividend would be better than a "special dividend," which would be over and done with in one shot. It would also be more flexible: If Apple ever ran into truly tough times, it could just cancel the or reduce the dividend.

But a massive buyback--on the order of $50 billion--would be the best of all.