The Next Dividend Powerhouse?

I've found the next dividend powerhouse. This company has 20% of its market cap in cash, trades at a low P/E of 13.8 (10.6 when adjusted for cash), and has a new CEO who is open to returning cash to shareholders. Read along and I'll reveal the company and 11 more dividend powerhouses you can buy now.

The next dividend powerhouse
If you haven't guessed already, the company is Apple (Nasdaq: AAPL  ) . The company has a cash hoard of $81.4 billion collecting dust in its treasury. It added $8 billion last quarter to that hoard, with no signs of that cash flow stopping. New CEO Tim Cook is open to returning cash. He would have three options:

First up, acquisitions. Large acquisitions have a horrendous record and would be counter to Apple's strategy of small acquisitions. As Motley Fool technology editor Eric Bleeker has said, "the idea of a company with such a unique vision and relentless pursuit of quality swallowing up and integrating another company doesn't make a lot of sense." With that out, we move on to option two.

Next up, buybacks. While some academics would tell you that buybacks are the best way to return cash to shareholders, Steve Jobs was opposed to buybacks. He was right. For one, they reward shareholders who are leaving, rather than those who are sticking with you. Second, companies have a horrendous track record of buying back shares at inflated prices. A recent study from McKinsey found that S&P 500 companies tend to buy back more shares when their share prices are high and stop purchasing when their share prices are low. The study goes on to say that "from 2006 to 2010, share repurchases came at the expense of long-term loyal shareholders by delivering lower returns than they might otherwise have received."

There is a better way. The study "compared the actual repurchases of S&P 500 companies from 2004 to 2010 with a modeled strategy of buying the same dollar amount of shares each quarter, much as an investor might regularly purchase shares as part of an income-averaging approach." The result? The median return of actual buybacks underperformed the strategy of regular payments by 4.5%. Overall, only 23% of companies' buyback programs beat the returns from a regular payment.

Apple would greatly benefit shareholders with a regular dividend. Apple generates more than enough cash to pay a hefty one. A $10 billion annual dividend would give the stock a yield of 2.8%, about on par with dividend champion Microsoft (Nasdaq: MSFT  ) and more than double fellow cash hoarder Cisco's (Nasdaq: CSCO  ) 1.3% dividend.

Some would argue that paying a dividend means the company is admitting it doesn't have strong growth opportunities. News flash: An $80 billion cash pile says the same thing. Research also surprisingly shows that on average, higher dividends actually tend to come with higher earnings growth. A study by Rob Arnott and Cliff Asness divided stocks into deciles and found that the highest-yielding decile had the highest earnings growth over the next 10 years. Some believe this happens because a dividend policy encourages companies to focus on profitability and avoid the waste that naturally occurs in a large company. Jobs tried to institutionalize a culture of innovation and focus before he gave up the reins of the company. A dividend policy could add to that institutional focus.

The powerhouse power-boost
A $10 billion annual dividend could easily be funded by cash flow from operations and not reduce Apple's current cash hoard. One thing to note about the cash is that $54.3 billion of the $81.4 billion is held by foreign subsidiaries and as such is subject to a repatriation tax if brought back to the U.S. Many large U.S. companies have this problem, including Pfizer (Nasdaq: PFE  ) , Eli Lilly (NYSE: LLY  ) , and others in the biotech sector, as well as tech stalwarts Intel (Nasdaq: INTC  ) and Oracle (Nasdaq: ORCL  ) . However, a repatriation tax holiday is being discussed in Congress, which could lead to a huge one-time special dividend, a veritable power-boost to this powerhouse stock.

Foolish bottom line
Apple has the opportunity to become a dividend powerhouse. If you are looking for some current dividend powerhouses, check out our brand-new free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." It features a diversified list of 11 powerhouse dividend stocks. Just click here for your free copy.

Fool contributor Dan Dzombak owns shares of Eli Lilly and Cisco Systems, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Intel, Apple, Cisco Systems, Microsoft, and Oracle. The Fool owns shares of and has bought calls on Intel. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Apple, Cisco Systems, Microsoft, Intel, and Pfizer. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft, a bull call spread position in Apple, and a bull call spread position in Intel.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (106)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2011, at 5:44 PM, dontwin wrote:

    I don't consider a 3% dividend a good recommendation when you can easily get 5-9%

  • Report this Comment On November 14, 2011, at 5:49 PM, JungleGent wrote:

    My favorite sentences in this article are:

    "Some would argue that paying a dividend means the company is admitting it doesn't have strong growth opportunities. News flash: An $80 billion cash pile says the same thing."

    How true! I wonder why so few see that -- me included.

  • Report this Comment On November 14, 2011, at 7:18 PM, EquityBull wrote:

    Apple does need to initiate a dividend and fast to defend their stock before it becomes fully "broken". The US lawmakers also need to allow repatriation at zero to 10 percent tax rate and do that fast too. This is a fast way to stimulate the economy without taxing the citizens one penny.

    The dividends would go to shareholders who could then spend it. What a concept, huh? Could our government be any dumber? I'm not sure it is possible.

  • Report this Comment On November 14, 2011, at 9:04 PM, rfaramir wrote:

    To avoid the repatriation tax, Apple should only calculate its (proposed) dividend based on US earnings. This will make it a smaller dividend, but it is going to be small at first, anyway.

    Politically, the tax needs to be fought tooth and nail. It is severely detrimental to US productivity. All that capital kept embargoed away from our shores can only be used to make foreign firms more competitive as it buys them more capital machinery, such as when Apple buys large quantities of supplies ahead of its needs. The receiving firm doesn't just pocket the money, it builds new machinery to supply Apple's needs, of course.

    Also, part of the problem is the absurd height of US corporate taxes to begin with. If they were lower, the repatriation wouldn't be such a big deal.

  • Report this Comment On November 14, 2011, at 11:51 PM, Chontichajim wrote:

    I only see disadvantages for Apple to pay a dividend at least if they want the value of their stock to grow. You compare a cash hoard to a dividend, but I see the cash hoards as due to weak economies leading to lack of consumption. The company I work for also has a lot of cash and stopped investing in labor intensive infrastructure due to the economy. A dividend is more permanent and it would tend to limit stock growth since dividend investors would rate its stock partly by the yield. Once Apple really does (if it does) become another MSFT, then it will be time to pay a dividend. For now let the stock price go wherever buyers wish to take it without a dividend.

  • Report this Comment On November 15, 2011, at 12:12 AM, hardnokgrad wrote:

    Kudos to truthisntstupid above for dividend analysis above! Also-

    I can understand politicians falling for the Sucker Punch of alleged job creation from a Repatriated Profits Tax holiday, but I would expect more from the Foolish Community. I got a sudden education from a Yahoo Ticker interview (I spent an hour searching, but I can't resurrect his name!) with an author of a recent book who knows something about corporate finance, explaining that-

    Corporations can repatriate 100% of those earnings TOMORROW, at no cost, WITHOUT A TAX CUT INCENTIVE! How? The foreign subsidiary LENDS the $$$ to the US subsidiary (interest rates now almost ZERO), and the US subsidiary DEDUCTS the interest! as a business cost (Corps taxed on NET, not GROSS!). Right now they have NO REASON to create jobs producing more stuff, for NO DEMAND just so politicians / public satisfied.

    Another thing interview omitted is, that 'HOLIDAY" boosters ignore is STATE TAX! Holiday would be Federal tax, You'd have to get all 50 States to fall in line, also, at what benefit to them? What is Corp. tax loss vs income tax/ sales tax gain to State? Some states have little or no Corp/ Income /sales tax. Borrowing approach has no different impact across State taxes! and its here now for Corp.s to use. Whatever their agenda for pushing 'holiday' I don't think its 'as advertised'!

    We need more financial /tax literacy and less wishful thinking from politicians, and it wouldn't hurt in MF articles, either.

  • Report this Comment On November 15, 2011, at 2:46 AM, mikecart1 wrote:

    If anyone really believes AAPL will ever give a dividend, I urge you to stop investing and seek help immediately. The day they offer a dividend is the day this countries true unemployment rate hits 5% or lower... ie it ain't happening baby!

  • Report this Comment On November 15, 2011, at 5:10 AM, gilsh wrote:

    If Buffet buys Tech companies, anything can happen, and yet, I don't believe AAPL's genetics will enable it to give away some of its piled cash, new management or not.

    I think that the company is too well aware of the thinness of its moat, and the way competition is closing gas:

    Apple is no longer smart phone vendor #1

    (wrote about it in my blog: http://websightstory.blogspot.com/2011/10/apple-is-no-longer... )

    and Kindle Fire will undoubtedly make a dent in AAPL's tablets sales (related to that in my blog http://websightstory.blogspot.com/2011/11/kindle-fire-is-shi... ) which means it will have to put some cash to strengthen that moat somehow - maybe on the new TVs, maybe on some other imaginary gadget. But R&D and Design in AAPL's standards costs a lot of money. And as the iPhone and iPad will not bring as flourishing a cash flow in coming years as it did when AAPL was alone in the ring, no sane management educated in Steve Jobs image shall make a miscalculated move of reducing the much needed R&D funding reserves for something as doubtful as making investors like them more (as if investors are showing signs of feeling less passionately about the company, anyhow).

  • Report this Comment On November 15, 2011, at 5:59 AM, PeakOilBill wrote:

    Go with Big Oil or AT&T or Verizon, something the Chinese can't kill with cheap labor.

  • Report this Comment On November 18, 2011, at 11:08 AM, Truth2Power wrote:

    Dividend or no dividend, I think AAPL's a buy at current price of below $380.

    I wouldn't plug a dividend into my valuation computations unless it was already announced. Until that point, any speculation is just that: speculation.

  • Report this Comment On November 19, 2011, at 10:45 PM, animekenji wrote:

    Easy solution to the repatriation tax. Apple pays their suppliers with money in overseas accounts, imports a surplus of product into the U.S., then gets that money back when they sell their products here in the U.S. Apple brings the money home and Uncle Sam doesn't get a dime extra in taxes. I have neighbors who come from a country that has strict limits on the amount of cash that they allow you take out of the country when you leave and they did something similar. They invested all their money in their home country in gold jewelry, then when they came to the U.S. they opened a jewelry store, sold the jewelry, and made their money back. There's absolutely nothing illegal about any of it.

  • Report this Comment On November 20, 2011, at 6:45 AM, TimoDOZ wrote:

    ASX just recently paid out an 11% dividend.

  • Report this Comment On November 21, 2011, at 12:36 AM, isacsimon wrote:

    "The company has a cash hoard of $81.4 billion collecting dust in its treasury. It added $8 billion last quarter to that hoard, with no signs of that cash flow stopping."

    This is brilliant.Things investors generally tend to miss. Great article Dan!

    -Isac

  • Report this Comment On November 21, 2011, at 6:52 AM, Mrknownot00 wrote:

    Perhaps I am dumb but Apple presumably need a lot of this cash to pay Samsung etc in the pending court cases.

  • Report this Comment On November 21, 2011, at 3:03 PM, Ostrowsr wrote:

    IF AAPL IS SUCH A GREAT OPPORTUNITY, WHY DO THE CAPS RATE IT WITH ONLY 3 STARS?

    SIGNED,

    CONFUSED AND SKEPTICAL

  • Report this Comment On November 27, 2011, at 3:37 AM, krazycanuck wrote:

    >Steve Jobs was opposed to buybacks. He was right. For one, they reward shareholders who are leaving, rather than those who are sticking with you.

    Sorry, but you missed the point here...

    Buying back stock from shareholders who are leaving rewards those who are staying by anti-dilution (reducing the number of shares outstanding), which increases EPS, if everything else is 'constant'. Thus it should INCREASE such ratios as EPS, Cash flow (and free cash flow) per share, etc. Obviously if buybacks are used to provide shares to senior managers cashing their stock options, this argument is weakened.

    Second, companies have a horrendous track record of buying back shares at inflated prices.

    Have to agree with you here.... Would be better if they "retained earnings" during good times, and used them to buy back their shares in recessions, if they don't need the cash for their business. Of course, like too many foolish (note the small "f") investors, they tend to buy high and sell low (i.e. issue new shares to fund capital requirements if they cannot get loans).

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