In the eyes of a dividend investor, the only thing that is better than a dividend payment that can be maintained for a long time is a dividend that can be raised. If we look across the investing landscape, there are companies where the possibility of a dividend raise is obvious, the result of a major corporate change, or maybe not the best thing a company can do with its cash. With that in mind, let's take a look at three companies that fill each of those situations.
The obvious candidate
Was there a ever a better candidate of a company that has the financial strength to raise its dividend more than Apple (AAPL -0.34%) does today? Yes, the company faces several headwinds, ranging from slowing iPhone 6 sales and a less-than-stellar response from the Apple Watch to the underlying feeling that some think the company's best days are behind it. Despite all of these issues, the fact of the matter is that the company continues to generate gobs of cash flow and sits on an unparalleled war chest.
Even if we were to account for the recent EU-related tax charge that could ding the company for $14.5 billion, Apple still has $217 billion in cash and short- and long-term investments at its disposal. What's more, the company continues to generate enough cash to pad those coffers even more. Over the past 12 months, Apple's levered free cash flow was $43.2 billion. Granted, much of that cash hoard and a decent chunk of that cash-generating ability come from overseas and sit in accounts there to prevent costly repatriation taxes. The underlying idea here is that the company has plenty of cash on hand to use at it sees fit.
Even if the company were to experience a couple more hiccups with its operations, the company has more than enough wiggle room in its profitability to make up for it from a dividend standpoint. Some investors may be worried about some aspects of Apple's future -- based on its current valuation, there are a lot of them -- but one thing that likely isn't a worry is the company's ability to grow its dividend.
One of the issues that has held General Electric (GE 1.90%) back from significant dividend raises in recent years has been the company's designation as a Systematically Important Financial Institution -- the too big to fail moniker. This meant that the company had billions of dollars in cash that was restricted from being deployed, as it was a guarantee on any bad debts the company may have been holding as part of GE Capital. At the end of the most recent quarter, the company had more than $42 billion in restricted cash on top of the $9 billion in unrestricted cash.
Now that the company has significantly wound down GE Capital to a much smaller part of the business and has shed its designation as a too big to fail entity, it has greater ability to deploy that cash, either toward capital investment or toward shareholders, notably dividends.
It also helps that GE is a more focused company that has a couple of intriguing irons in the fire that could help sustain further dividend growth. One of those irons is its Predix software. Predix is an operating system that is specially designed to bring the Internet of Things to industrial applications. For customers, it means more efficient operations, thanks to constant monitoring of equipment. For GE, its a recurring revenue source from software licenses that it has never had before in its industrial manufacturing businesses. The combination of all that extra cash today and improving cash streams suggests that there will be plenty of room for GE to raise its dividends both now and in the future.
Could, but maybe not the best move
Sometimes, a company's financial statements suggest that it could raise its dividend, but that doesn't necessarily mean that is the best thing to do. One great example of this is oil services giant Schlumberger (SLB 1.99%). On paper, the company could completely justify increasing its dividend: It continues to generate free cash flow at a decent rate, its balance sheet is in decent shape, and the company has weathered the downturn in the oil and gas industry better than most.
If we start to look at the landscape of the oil and gas industry, though, it would seem that perhaps foregoing a big dividend raise and holding on to that cash for a while is a better move. This is the case because of the changing dynamics of the industry. The ability to access shale resources as a very commercially competitive source is likely going to mean less investment in the more expensive offshore reservoirs. This is important because Schlumberger is a larger player in offshore drilling than in shale and has even doubled down on its offshore business with the recent acquisition of subsea equipment maker Cameron International. Then there is the fact that there are still plenty of struggling companies that could be acquired for the right price. This could be an opportune time for Schlumberger to deploy that cash elsewhere -- and raise its dividend at a later date.