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

G

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:

QuarterQ3'13Q4'13Q1'14Q2'14Q3'14
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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers