Despite only two years of dividend history, Apple (AAPL 0.38%) is an excellent dividend stock. Where its dividend history lacks, its cash flow makes up for it. Thanks to Apple's $50 billion in annual free cash flow, Apple's dividend yield looks poised to see an annual increase for years to come, this year included.
Apple as a dividend stock
Former Apple CEO Steve Jobs hated dividends. And it's probably good that he did. During his second reign as CEO, almost every dollar spent on capital expenditures, research and development, and marketing seemed to pay off handsomely. The results of spending and investments under Jobs after his comeback in 1997 were the revolutionary candy-colored iMacs, iPods, iPhones, and then iPads.
During Apple's incredibly hot streak after Jobs took the reigns again in 1997 to his resignation in 2011, the company's revenue absolutely skyrocketed, catapulting Apple to be the world's most valuable publicly traded company.
AAPL Revenue (Annual) data by YCharts
With this sort of revenue growth, investors had no reason to complain about the company's capital allocation policies.
But with annual revenue of more than $100 billion and profit margins close to 44% in 2011, investors were getting antsy. The pile of cash on Apple's balance sheet just kept getting larger. Shortly after Jobs passed, the once despised but now inevitable finally happened: Apple announced a dividend. The move was one of the first major steps Apple CEO Tim Cook made in what would become the world's biggest program to return cash to shareholders through dividends and share repurchases -- by far.
Today, there's really no way to argue against an Apple annual dividend. The company is bringing in $182.8 billion in revenue and $50 billion in free cash flow on an annual basis. And then, of course, there is its $158.8 billion in cash and marketable securities.
Today, Apple pays out $0.47 per share quarterly, or $1.77 annually. That's up from a split-adjusted $0.38 per share when Apple paid its first dividend under Cook in 2012. The company increased its dividend in 2013 and again in 2014.
More dividend increases are coming
Apple's 2014 dividend increase won't be the company's last. In fact, it is probably far from it. Apple's current dividend as a percentage of earnings is just 28%, reflecting just how much room to spare Apple has for further increases in the coming years. Indeed, Apple said in a 2014 press release that it plans to increase its dividend on an annual basis.
Today, share repurchases make up the majority of Apple's capital return program. Apple's current capital return program has authorized $90 billion for repurchases, of which $68 billion has already been spent. But with shares much pricier than they were when the company last updated its capital return program, share repurchases won't bring as much value to shareholders as they did in 2013 and early 2014, making dividends look a bit more enticing than they did in the past. If Apple management still believes its shares are not overvalued, there is plenty of room for more of both dividends and repurchases. It takes a lot of giving to make a dent in a $158.8 billion war chest when Apple is bringing in $50 billion in free cash flow each year.
Apple Store. Image source: Apple.
My guess is that Apple will boost its dividend by 8% or more this year, in line with Apple's 2014 dividend increase. Indeed, Apple's cash flow could support 8% dividend increases for years, making this prediction quite conservative.
Beyond Apple's dividend, hopefully the company continues to repurchase shares aggressively -- maybe even aggressively enough to finally make a dent in its mind-boggling cash hoard.
