If you're an Apple (NASDAQ:AAPL) shareholder or are thinking of becoming one, then it's probably a good idea to have some understanding of the company's capital allocation policy. Apple generates a lot of free cash flow, and it's not shy about putting that cash into its investors' pockets through its share repurchase program, as well as its significant and growing dividend. 

Here are the key elements of Apple's capital allocation policy that investors should know.

A child drawing on an iPad with an Apple Pencil.

Image source: Apple.

Apple's dividend policy

As of today, Apple's quarterly dividend sits at $0.73 per share, which adds up to  $2.92 per share annually. At current share prices, that translates into a dividend yield of around 1.73%. This isn't the biggest yield that you can get from a tech company -- there are some great ones whose stocks yield more than 4% -- but it's better than nothing, and the company has been raising its payout at least once a year since 2012. 

Also, keep in mind that while Apple seems committed to paying dividends, CFO Luca Maestri was quite candid on the fiscal second-quarter earnings call in May (the company generally announces its capital return updates around that time each year) that dividends play second fiddle to share buybacks. 

Said Maestri:

But when it comes down between dividends and buyback, our view is that for a variety of reasons we see a lot of value in the stock. We believe the stock is undervalued and so we have a bias toward the buyback. So the dividend is a very large component of capital return because we're going to be returning more than $13 billion a year to investors through dividends, but we believe that given where we are with the valuation of the stock, we think that we continue to do the buyback primarily.

So, while investors can rely on Apple delivering annual payout increases (after all, Apple probably wants to keep its dividend growth investors happy), keep in mind that paying the biggest dividend it possibly can doesn't seem to be on the agenda. (If Apple were interested in maximizing its dividend, it could easily pay out a lot more than it currently does.)

The buyback

As the preceding discussion indicates, Apple's capital return policy is heavily focused on its share repurchase program. Over the years, Apple has bought back a lot of stock and has, as a result, drastically reduced its share count: 

AAPL Average Diluted Shares Outstanding (Quarterly) Chart

AAPL Average Diluted Shares Outstanding (Quarterly) data by YCharts

The reduction in share count is a good thing for shareholders because it means that the company's net income is split among fewer shares, boosting earnings per share (EPS).

The company said in its most recent quarterly filing that, as of Sept. 29, 2018, it had used $29 billion of the $100 billion repurchase authorization announced on May 1, 2018. This means that it can still buy back about $71 billion worth of shares under its current program.

For some perspective, Apple's current market capitalization stands at around $800 billion, based on the stock's most recent closing price of $168.49 and the company's reported outstanding share count as of Oct. 26, 2018. This means that with what's remaining on the current repurchase authorization, Apple could buy back nearly 9% of its shares outstanding. (That percentage would've been lower before the recent steep stock price decline.)

Investor takeaway

Apple has a solid capital return program in place that ultimately does right by its shareholders. It has a respectable and growing dividend, and an aggressive stock buyback program, which should ultimately help boost its EPS.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.