When Apple (AAPL 0.64%) reports earnings on Tuesday, analysts will almost undoubtedly be focused on metrics like iPhone and iPad sales, total revenue, and EPS. But let's not forget to check in on one of the most impressive numbers Apple reports every quarter: its cash. Apple's healthy cash, along with its seemingly never-ending stream of more green, is what makes Apple an excellent dividend stock.
Image source: Apple.
Apple's ocean of cash
At $150.6 billion in Apple's second fiscal quarter, the company's cash hoard is no joke. In fact, it's the largest known pile of cash held by any corporation in the world. What's even crazier is that the source of Apple's cash -- earnings -- doesn't look poised to decline in the near future at all.
New categories, a rumored iPhone 6 with lineup with larger displays, no sign of waning pricing power, and gross profit margins that seem to have stabilized at abnormally high levels, should help Apple continue to rake in lots of cash in the coming years.
Apple is incredibly profitable. Over 21% of Apple's sales end up on its bottom line. And considering Apple is bringing in $176 billion in sales a year, a bottom line with this sort of profitability is a lot of money -- more money than Apple could ever spend on its business or growth opportunities.
The result is Apple using a good chunk of earnings to do things like pay out dividends and repurchase shares. Sure, Apple has shown excellent stewardship recently with its current $130 billion capital return program, of which $66 billion of this authorized elephant gun has already returned to shareholders, that expires at the end of calendar 2015. But the cash just keeps coming in.
iPhone 5s. The majority of Apple's earnings come from sales of iPhones. Image source: Apple.
Consider this: Apple is paying out $11 billion per year in dividends. Yet its payout ratio, or dividends divided by earnings, is just 29%. That leaves a lot of room for Apple to increase its dividend in the coming years.
No wonder Apple said in its most recent update on its capital return program that it expects to increase its dividend on an annual basis.
What Apple's dividend growth could look like
For how many years, and to what extent, can Apple boost its dividend? It would take more than 15 years for Apple to get to the point where it is paying out 100% of its earnings in dividends if it continued to increase the dividend by 8% annually. And this assumes Apple doesn't grow its earnings at all in the next 15 years.
Imagine if Apple's dividend growth in the next 10 years looked like this.
Forecast by author.
And what's great for Apple investors is that this scenario is actually fairly conservative. After 10 years, assuming Apple's earnings stayed at current levels, Apple's payout ratio would be just 64%, leaving plenty of room for Apple to continue to invest in new growth opportunities and repurchase shares.
With Apple's current dividend yield of just 2%, income investors might be tempted to pass on Apple. But once you add in the potential dividend growth for this market leader, Apple certainly looks like a good bet for investment income over the next decade.
