Apple (AAPL 1.27%) is scheduled to report earnings on Monday, April 27. Wall Street analysts and the media will most likely focus their attention on the key financial metrics, which will be driven mostly by sales of the company's iPhone 6 and iPhone 6 Plus devices. Besides, Apple Watch will be available for sale in many big markets on April 24, so everybody will want to know how Apple is doing in this exciting new category.
In addition, Apple will most likely announce a dividend increase, and perhaps also an enlarged stock buyback program. Investing in companies with big and growing capital distributions is one of the most proven and effective ways to beat the market in the long term, so investors should keep a close eye on Apple's coming announcements in this area.
Watching the iCash flows
Apple increased dividends by 15% in 2013 and by 8% in 2014, both times in April. Also, CEO Tim Cook said in the last earnings conference call that Apple will be announcing an update to its capital distribution program in April, so chances are there will be important news when the company reports earnings for the quarter ended in March.
Apple has distributed massive amounts of money to investors over the past several quarters. In the past 12 months alone, the company returned over $57 billion to shareholders when including both dividends and buybacks. As of December, Apple had already taken action on $103 billion of its $130 billion capital return program.
Importantly, the business generates tons of money, and Apple has more than enough room to continue increasing distributions in the future.
Apple generated over $30.5 billion in free cash flows during the quarter ended in December, with dividends absorbing only $2.8 billion of that money and share buybacks demanding an additional $5 billion. Besides, the company has a gargantuan cash balance, with nearly $178 billion in cash and liquid investments on its balance sheet.
Considering both Apple's cash flow generation capabilities and management's willingness to reward shareholders with growing distributions, everything seems to be indicating that investors in Apple stock will be benefited with growing dividends and buybacks over the middle term.
Dividends and buybacks to outperform the market
Different statistical studies have proven time and again that companies making big capital distributions tend to generate superior returns over time.
Based on research data from Goldman Sachs, $10,000 invested in non-dividend-paying stocks in 1972 would have turned to $30,363 by the end of 2014. Dividend-paying companies crushed those returns, as the same amount of money invested in dividend stocks would have turned into $461,904 over that period.
Even better, companies with consistent dividend growth outperformed both dividend and non-dividend-paying companies by a considerable margin: A $10,000 investment in companies consistently raising dividends from 1972 to 2014 would have turned into a much bigger $630,024.
Companies with big shareholder yields -- meaning dividend yield plus buybacks and debt reductions -- also tend to beat the market by a considerable margin over time. According to data from Mebane Faber's book Shareholder Yield: A Better Approach to Dividend Investing, based on historical returns from 1982 to 2011, a $10,000 investment in the S&P 500 would turn into $28,292 after 10 years, while the same amount of money invested in high-shareholder-yield companies would turn into a much larger $40,196 in that period.
The money to pay dividends and repurchase stock doesn't grow on trees. You need a healthy and profitable business to generate the cash flows to make growing capital distributions over the years. With this in mind, it's no wonder companies distributing big sums of money to investors tend to deliver superior gains over the long term.
Apple will most likely announce an increase in capital distributions on April 27, and the company has both the willingness and the resources to sustain growing payments over the long term. This is clearly a big positive for investors in Apple stock.
