When Apple (NASDAQ:AAPL) announced its second-quarter results on Monday, the company also updated its capital return program, committing to further share repurchases and a higher dividend. Of these two methods for returning cash to shareholders, Apple's share repurchase program usually gets the most spotlight in the media. But the company's dividend is worth some attention, too. Sure, the tech giant doesn't have a long history of consistent dividends, but there's still a host of reasons to believe that the stock could play out to be a decent investment for income investors over the long haul.
Apple's most recent dividend increase was its third in less than three years. The new dividend of $0.52 per share, payable on May 14 to shareholders of record on the close of May 11, is up 11% from Apple's previous quarterly dividend. The rate of this year's increase falls in between Apple's other two increases since the company reinitiated a dividend in 2012. In 2013 and 2014, Apple increased its dividend by 15% and 8%, respectively, compared with the year before.
Annually, Apple's dividend payout is now $2.08 per share, amounting to approximately a 1.6% dividend yield at today's share price.
While Apple's dividend yield of 1.6% certainly isn't impressive, investors should note that the dividend is likely to see annual increases for years to come. Both the strength of Apple's balance sheet and comments from management about its plans for its dividend support this notion.
To get an idea of just how easy it is for Apple to afford to pay out dividends at current levels, consider its conservative payout ratio, or Apple's annual dividend as a percentage of earnings, of 25%. With a reasonably low payout ratio like this, the company could still afford to increase its dividend on an annual basis even if earnings growth stalls or takes a hit.
Or, here's another way to put Apple's dividend in perspective: Consider it in relation to the company's cash flow. In the trailing 12 months, Apple's free cash flow, or the good stuff left after operations and capital expenditures, was a whopping $64.3 billion. During this same time period, Apple paid out just $11.2 billion of this cash in dividends.
It's also worth noting that Apple's free cash flow is by no means showing any signs of plateauing. Consider the company's free cash flow growth in recent years:
Then, of course, there's Apple's $193.5 billion in cash and marketable securities. Sure, Apple carries $29 billion in long-term debt on its balance sheet -- but that's a paltry figure in light of its cash hoard and annual free cash flow.
Reviewing Apple's cash position, it's clear Apple can afford annual dividend increases for years to come.
Fortunately, however, investors don't have to rely solely on my analysis for supporting the case for continued annual dividend increases. During Apple's Q2 earnings call, CFO Luca Maestri clearly said the company plans to continue to increase its dividend annually.
"We believe this is a meaningful increase for those shareholders who value income, and we continue to plan for annual dividend increases going forward," Maestri said.
Apple may still be a new option for income investors, but it shouldn't be overlooked. Yes, its dividend history may not measure up well against the hallmark dividend stocks income investors are used to. And its small dividend yield certainly isn't impressive, either. But Apple easily makes up for these shortcomings with a top-notch business, consistent market leadership, and a reasonable stock price in relation to its underlying fundamentals.