For investors looking for income, Apple (AAPL 0.51%) stock is a good bet. After initiating a dividend in 2012, and joining the universe of cash-cow dividend stocks, the company has garnered an excellent reputation as an income investment. Since it initiated a dividend in 2012, Apple has increased its dividend two times.
But can investors expect the company to continue to increase its dividend payout over the long haul? More specifically, what exactly could the income from Apple's dividend look like during the next 10 years? Let's explore to see if Apple is worthy of consideration by long term income-oriented investors.
Image source: Apple.
Apple dividend: Are increases likely?
"The company also plans to increase its dividend on an annual basis," Apple said in an April 2014 press release that detailed the company's second annual increase to its dividend. The statement was important; It indicated that Apple plans to provide not only a stream of income for dividend investors, but a growing stream of income. It solidified Apple's spot among hallmark cash-cow dividend names.
But what sort of dividend increases can we expect from Apple going forward?
When Apple first increased its dividend, in April 2013, it was increased by 15%. The second increase, in April 2014, was a more conservative 8% boost. For the sake of conservatism, we'll assume that Apple increases its dividend in line with the lesser of these two increases -- 8% annually going forward. But first... is it really possible for Apple to continue to increase its dividend by 8% annually?
Absolutely. Apple has been spending its cash aggressively on a share repurchase program in conjunction with its dividend to take advantage of irrationally low share prices. During the course of its program to return cash to shareholders -- since it was initiated in 2012 and when it's scheduled to expire at the end of calendar 2015 -- Apple has authorized a whopping $90 billion toward repurchases. And now, with shares currently trading at all-time highs, Apple is likely to tone down its spending on repurchases after the close of 2015, leaving more cash for dividends.
But what if Apple continues to emphasize repurchases over the long haul? The company's current annual dividend payouts only amount to $11.1 billion annually -- far less than it's spending on repurchases. Apple easily has the free cash flow to continue to increase its dividend annually while still spending as much as $20 billion to $35 billion on share repurchases, down from the $45 billion it spent in fiscal 2014 -- but that's still an aggressive number.
Apple dividend: a forecast
If Apple increased its dividend by 8% annually during the next five years, its annual dividend would amount to $2.76 per share after an April increase in 2019. On a cost basis of $113 per Apple share today, that's a 2.4% dividend yield in five years. Going out further, Apple's dividend could amount to $4.06 in 2024, or a dividend yield on a cost basis of $113, of 3.6%.
While these yields aren't astounding, if they are paired with the excellent prospects for Apple stock, in general, the dividend growth is good enough to make Apple stock a good investment for income investors.
Best of all, Apple's free cash flow, or the good stuff that enables a company to pay out a dividend in the first place, is ample enough to make an 8% annual increase in Apple's dividend during the next 10 years not only likely, but also conservative.
AAPL Free Cash Flow (TTM) data by YCharts.
Free cash flow is equal to a company's operating cash flow minus capital expenditures. In other words, it's the cash left over after taking care of operating costs to run the business and after making needed investments for the business' future. With current annual levels of free cash flow of about $50 billion, and annual dividend expenses only around $11.1 billion, Apple has tons of room to increase its dividend in the future.
Apple should pan out to be an excellent dividend stock during the next 10 years.
