In 2012, Apple (NASDAQ:AAPL) broke with its long-standing tradition of simply hoarding all its cash when it announced a dividend and a stock buyback program. The initial quarterly payout was set at $2.65 per share ($10.60 annualized), and the share repurchase authorization was $10 billion. While the share buyback is another story for another article (I recommend fellow Fool Evan Niu's article), today I'd like to talk about one reason I'm a huge fan of Apple's dividend.
A solid history of increases
Apple's initial quarterly dividend (for the program started in 2012; the company also paid a dividend in the 1990s) was increased by approximately 15% in 2013, to $3.05 per share, and by another 7.9% in 2014, to $3.29 per share. Those generous payout boosts have likely made its shareholders very happy.
In a press release issued in April of this year, Apple said it "plans to increase its dividend on an annual basis." While this is likely the goal of most major dividend payers, this commitment should be encouraging to long-term Apple investors.
What does committing to dividend increases really mean?
Apple noted in that press release that at current quarterly rates, it is paying out $11 billion in dividends. To put this into perspective, Apple's trailing 12-month free cash flow came in at a whopping $49.90 billion according to S&P Capital IQ.
While much of this likely cash held abroad (which can't be used to pay dividends without Apple taking a tax hit), Morgan Stanley (via Fortune magazine) estimated in 2012 that Apple's domestic free cash flow for the year would come in at $18 billion. Assuming Apple generates similar amounts of domestic cash in the coming years (which is probably conservative given that Apple is likely to grow), the company still has plenty of room to boost the dividend.
Investors can very likely count on annual dividend increases for years to come
Apple is spending significant amounts of money to buy back stock. Assuming Apple can continue to grow its business, I would expect the company will continue to grow its dividend.
Even if the company experiences a rough year in which its free cash flow is either flat or slightly down, Apple could simply hold off on the buyback and allocate more of its domestic cash flow to the dividend while it works to grow the business again.
A final thing to keep in mind is that dividends, once committed to, are typically not cut unless the company feels it has no other choice. By saying it plans to increase the dividend each year from here on out, Apple is signaling that it believes in the long-term health of its business. Of course, if things go south, plans can change, but Apple -- given its extraordinary financial performance over the years -- has earned the benefit of the doubt, at least in my book.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.