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 (AAPL 0.52%). 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:
| Quarter | Q3'13 | Q4'13 | Q1'14 | Q2'14 | Q3'14 |
|---|---|---|---|---|---|
| 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.
