By Tiernan Ray

Toni Sacconaghi of Bernstein Research this afternoon opines that Apple (AAPL ) needs to learn from the mistakes of Microsoft (MSFT ), if it wants its shares to perform, and from the wisdom of International Business Machines (IBM ), as pertains to capital allocation .

Sacconaghi, who has Outperform ratings on Microsoft and Apple stock, and a Market Perform rating on IBM shares, nevertheless points out that IBM has achieved solid returns over several years by returning lots of cash to shareholders:

Which company would you prefer to own? Company A has grown revenue and free cash flow at 5% and 7.1% CAGR respectively from 2007-2012, and had an average FCF margin of 34% during the period. Company B has grown revenue and free cash flow 1% and 6.6% during the same period, and had an average FCF margin of 15%. If you chose B, congratulations – you outperformed the market by 8,000 bp and company A by 10,000+ bp. Company B, aka IBM, produced an 80% relative return (77% absolute) from 2007-2012. Company A, aka Microsoft, produced a relative return of -22% relative (-25% absolute) from 2007-2012. Why did IBM, with lower growth and margins, outperform Microsoft by such a significant amount? While part of it is attributable to MSFT beginning with a higher multiple (19.1x vs. 12.2x), IBM now trades at nearly a 30% premium to MSFT. We believe that another important driver of the disparity in stock performance has been capital allocation: IBM has returned 109% of its free cash flow to investors during the period (with buybacks significantly boosting EPS), while MSFT has returned 63% (and much less in the last two years). Buybacks drive EPS growth: IBM, on average, has returned 109% of FCF to shareholders with 89% going to share buybacks. Buybacks helped drive an EPS CAGR of 17% over the last five years. Microsoft, on the other hand, has been inconsistent with buybacks, returning 63% of FCF to shareholders with 41% going to buybacks. IBM's EPS CAGR was

1550 bp higher than revenue, while Microsoft's EPS CAGR was 8%, only 300 bp above revenue.

Adds Sacconaghi, IBM has been consistent in returning cash to shareholders, and it has even dipped into debt markets, when it had to, given sizable overseas cash holdings.

So what should Apple do?

We believe the comparison of the two companies highlights the importance of consistent, meaningful cash return, particularly to value/GARP investors, who remain under-represented in Apple's stock. We continue to espouse that Apple look to take on debt and commit to a meaningful return of its ongoing free cash flow generation. [. ] We would like to see Apple go so far as to announce that it intends to return a significant percentage of its ongoing FCF cash (perhaps 50% to 70%, preferably more given its current cash balance of $137B or $145 per share) to investors every year – it can then use a combination of vehicles (dividends and preferred stock; borrowing vs. paying tax) depending on prevailing interest rate and tax environment to fulfill its intention.

Apple shares today rose $7, or 1.6%, to close at $449.80, apparently propelled in part by rumors of a possible stock split being announced at tomorrow's annual shareholder meeting.