Technology giant Apple (AAPL 0.48%) may be about to give its shareholders a significant dividend increase. Over the past year, commentary on Apple has been structured around its lack of growth and its lack of innovation. While those are major story lines, the bull case for Apple has to do with its massive profitability and huge cash pile.
Over the next few weeks, that thesis could be reinforced through a sizable dividend increase. Apple is already a suitable recommendation for income investors. It currently offers a 2.3% yield, which tops the yield on the broader market. And, it's now been a full year since Apple's last dividend increase. That means Apple will very likely increase its payout in time for next month's declaration. Here's why I'm betting Apple will go big with its next dividend bump.
Mountains of cash earning almost nothing
Apple's cash pile has been well-documented in the financial media, and for good reason. Apple quite literally has more money sitting on its books than it knows what to do with. At the end of its most recent quarter, Apple reported $158 billion in cash, short-term investments, and long-term marketable securities. And, since interest rates are still near historic lows, it's a good bet that Apple is earning little to nothing on all that cash.
Recently, there has been a great deal of conjecture regarding what Apple should do with its cash. Buying a company in a new product category seems to top the list. Over the past few weeks, financial pundits have speculated that Apple should buy Netflix (NFLX -0.66%). This makes some sense, since Apple could easily afford Netflix's $23 billion enterprise value, plus a sizable takeover premium. And, buying Netflix could be a simpler and less costly way of integrating streaming television and movies instead of going it alone or partnering with a cable provider.
The sheer size of Apple's cash pile makes it entirely feasible to pursue an acquisition and still pay dividend. Technology giants are flush with cash these days, since they have little debt and plenty of free cash flow. In fact, Apple generated $45 billion in free cash flow just last year. That means it has more than enough financial flexibility to fund its internal growth initiatives, pursue a large acquisition, and/or pay a dividend.
Look for a double-digit increase
Apple earning almost nothing on its cash pile means the company is creating value for shareholders by paying its 2.3% dividend. And, considering other technology giants, with far less impressive cash hoards have higher yields than Apple, expect a generous bump when Apple increases its distribution.
For instance, technology rival Cisco Systems (CSCO 0.56%) pays a 3.5% yield and recently increased its dividend by 12%, despite struggling over the first six months of its fiscal 2014 year. Cisco's revenue fell by nearly 8% in the second quarter, due largely to poor performance in Asia. Its Asia Pacific, Japan, and China division saw product orders decline 5% in the quarter.
Plus, Apple is about to embark on a period of new product releases. Over the next several months, we could see a watch, a TV, and an upgraded iPhone. The point is Mr. Cook should have more than enough confidence to increase the dividend by at least 10%.
Apple is a great income pick
For investors, who love to receive income from their stocks, technology offers a surprising source of yield. That includes Apple, which already offers a market-beating dividend yield that is about to go even higher.
Some might prefer Apple not to pay a dividend, and instead invest in future growth. But, at this point Apple has more than enough cash to do just about anything it wants. Apple can easily invest in future R&D, acquire a large competitor, and pay a hefty dividend.
I'm betting Apple will generously increase its payout by 10% to 20% at some point in the next few weeks. If that happens, the new yield on Apple could near 3% annualized, making Apple a great pick for dividend investors.