There are very few companies profitable enough to shower their shareholders with more than $10 billion in dividend payments each year. It's a staggering sum, higher than the annual revenue of almost the entire bottom half of the Fortune 500. Software giant Microsoft (NASDAQ: MSFT), smartphone king Apple (NASDAQ:AAPL), and telecom behemoth AT&T (NYSE: T) are three companies that manage this feat.
Microsoft has stepped up its dividend game in recent years. The company paid out $1.39 per share in dividends in fiscal 2016, up from $0.76 in fiscal 2012 and just $0.39 in fiscal 2007. That's a compound annual growth rate of 15% over the past decade.
Fiscal 2016 marked the first year that Microsoft paid out over $10 billion in total dividend payments. In fact, just over $11 billion got sent to shareholders last year. This dividend growth has been accompanied by a surging stock price, with shares up about 70% over the past three years.
Microsoft has been aggressive in its embrace of cloud computing and subscription software. The company has maintained its dominance in the productivity software market, selling its iconic Office suite of applications in subscription form as Office 365. On the consumer side, Office 365 now has over 26.2 million subscribers. Microsoft discloses less about the commercial side, but Office 365 commercial revenue soared 45% year over year during the latest quarter.
Azure, Microsoft's cloud platform, is the No. 2 player behind Amazon Web Services. That business is surging as well, with year-over-year growth of 93% during the latest quarter. These growing businesses have helped Microsoft produce record free cash flow of $32.3 billion in fiscal 2016. That allows Microsoft to not only dole out $11 billion in dividends, but also spend billions buying back its own shares. The dividend has plenty of room to grow going forward, although Microsoft will need to keep growing its cloud business at a blistering pace.
Apple only began paying a dividend in 2012, but it's already shelling out incredible sums to shareholders. The iPhone maker paid shareholders just over $12 billion in dividends during fiscal 2016, and it spent an additional $29.7 billion on share buybacks. That second number is actually down from a couple of years ago, when Apple spent a staggering $45 billion on share buybacks.
Despite launching new devices like the Apple Watch and pushing its various services like Apple Music, Apple remains heavily dependent on the iPhone. That's fine when the iPhone is selling well, but unit sales dropped for the first time last year, and the most recent quarter also featured a decline. The iPhone was responsible for 63% of total revenue during the latest quarter, so any weakness in that business puts pressure on the top and bottom lines.
Apple's dividend is well covered by free cash flow and the company's enormous mountain of cash, and the cushion is so large that even a major iPhone disappointment will likely keep the dividend safe. Apple produced $52 billion of free cash flow last year, enough to pay the dividend four times over. The balance sheet contains a whopping $158 billion of net cash and investments.
New iPhones are coming later this year, and some analysts are predicting a surge in sales as customers upgrade. The dividend should continue to be raised going forward regardless of what happens, but the stock could sink if Apple fails to deliver.
Of these three stocks, telecom giant AT&T is the only traditional dividend stock. Microsoft has only ramped up its dividend in recent years, and Apple is just getting started. AT&T has been increasing its dividend each year for more than three decades, a feat that makes it one of the few Dividend Aristocrats.
AT&T paid out $11.8 billion in dividends in 2016, a number that grew much faster than the per-share dividend thanks to an increase in the share count due to acquisitions. AT&T had 6.19 billion diluted shares at the end of 2016, up from just 5.22 billion at the end of 2014. AT&T agreed to acquire DIRECTV in 2014 for $67 billion, including debt, paid for by a combination of cash and shares.
AT&T also announced plans to acquire Time Warner late last year in a stock and cash transaction valued at $108 billion, including debt. These acquisitions come at a time when the U.S. wireless market is seeing increased competition as carriers fight for subscribers in a mature market. AT&T is spending big to diversify, a risky strategy that could put the dividend in danger if these acquisitions fail to produce the expected results.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.