Apple, Inc.’s Dividend: Tim Cook’s Secret Weapon?

Lost in Apple's great growth potential is its value as an income investment.

Aug 18, 2014 at 11:00AM


Tim Cook has made Apple an income-investor's dream. Source: Wikimedia Commons

As far as the 21st century is concerned, there has been no technology company more influential than Apple (NASDAQ:AAPL). After overcoming a tough '90s, Apple became the growth story throughout the 2000s. If you would have bought shares on Jan. 2, 2001 -- and held them -- you'd be sitting on a nice capital gain of around 9000%, or enough to turn $10,000 into almost a million.

With all that growth, it makes sense for growth investors to pile into Apple waiting for that "next big thing." But if history shows us anything, it is that it is hard for a large company to continue to grow at the same levels it once did. However, that doesn't mean Apple is done enriching investors. Overlooked by many, Apple's dividend and its future potential make it a strong income investment.

Tim Cook's shareholder friendly policies
Upon taking the reins from former CEO and Apple savior Steve Jobs, Tim Cook started a refocusing of sorts for the company. Of particular focus was the company's relationship with shareholders. Cook, being more of a classic value-creating manager type, understood the delicate balance between all stakeholders: customers, employees and suppliers, and shareholders. Steve Jobs was a ruthlessly focused product guru that felt if products were revolutionary then ultimately shareholders would be happy.

To be fair, Steve Jobs led one of the most amazing turnarounds in history and is widely considered one of the best CEOs ever. However, at times he came across as shareholder unfriendly -- especially when it came to Apple's growing cash hoard.

Cook reversed that decision; within a year of officially taking the reins Apple reinstituted its dividend it had abandoned in the mid-90s by paying $0.37857 per share -- or $0.054 on a split-adjusted basis. Since then, he's raised that amount to $0.47 quarterly within two years for an annualized growth rate of nearly 12%, including a near-7% increase from last year's third quarter to this year's corresponding quarter..

The great part, it can continue
When looking for sustainable dividends, investors should look at two things. First, does the company have the cash to pay the dividend on its balance sheet. Secondly, and just as important, is the company producing enough cash through operations to continue to pay the dividend.

The answer to the first question is an emphatic yes. Apple's cash hoard is the stuff of legends. Tipping in as of the last quarterly report at $164 billion, Apple has the cash to pay last quarter's dividend amount of $2.87 billion for the next 58 quarters -- or the next 14.5 years if one excludes those pesky repatriation taxes.

However, the more impressive takeaway is that the company doesn't have to rely on its growing cash pile; the company actually makes enough through operations to cover paying this dividend. Using an appended free-cash-flow payout ratio you can see that Apple has the ability to pay its dividend from operations:

Cash from Ops. $7,828 $9,908 $22,670 $13,538 $10,255
CapEx $1,885 $1,955 $1,985 $1,382 $2,378
Free Cash Flow $5,943 $7,953 $20,685 $12,156 $7,877
Common Dividends $2,789 $2,763 $2,739 $2,665 $2,830
FCF Payout Ratio 46.9% 34.7% 13.2% 21.9% 35.9%

Source: Apple's 10Qs. All figures in millions except the free-cash-flow payout ratio, which is in percent.

So you can clearly see that Apple doesn't really need to tap into its growing cash pile because it has the potential to pay that dividend with ease. Even better, on a year-over-year basis, the free-cash-flow payout ratio decreased 10 percentage points this quarter.

In addition, astute readers would have noticed that although Apple's common dividend per share increased nearly 7% on a year-over-year basis -- going from $0.44 to $0.47 from the third quarter of 2013 to the currently reported period -- the total common dividends paid only went up 1.5%, from $2.789 billion to $2.830 billion. That's where Apple's other big shareholder friendly policy -- its massive share buyback -- comes into play.

Final thoughts
As previously mentioned, Apple has a certain following among the growth crowd -- and for good reason, the company's had a phenomenal run this century and now finds itself the highest-valued company in the United States by market capitalization. Lost in the enthusiasm is Apple's income potential. However, it appears Tim Cook is positioning Apple to be a great income play with the potential to pay and raise its dividend for years to come.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information