Apple (NASDAQ:AAPL) is one of the most popular companies in the market, and most analysts are deeply focused on its latest announcements and innovations. This is quite understandable, because products and services are undeniably important. After all, that's where sales and earnings come from.
However, from an investors' point of view, cash flow distributions can be a powerful return driver, so this factor should not be overlooked, especially when considering Apple, as it looks positioned to deliver big gains for investors on the back of growing dividends and share buybacks over years to come.
Apple's growing dividends and buybacks
Apple reinstated its dividend in 2012, and increased payments by 15% in 2013, 8% in 2014, and 11% in 2015. The quarterly payment is $0.52 per share; this means a dividend yield of 1.6% at current prices, which is not particularly exciting in comparison to other dividend stocks in the tech industry.
Management is prioritizing share buybacks over dividends when it comes to rewarding shareholders. Apple has recently increased its share-repurchase authorization to $140 billion from the $90 billion level announced last year. From the inception of its capital-return program in August 2012 through this March, Apple has returned more than $80 billion to shareholders in the form of buybacks.
Importantly, the company has a lot of room to raise dividends and buybacks during the years to come. Apple has nearly $194 billion in cash and liquid investments on its balance sheet. Even after deducting $40 billion in long-term debt, and $3.8 billion in commercial paper obligations, this still leaves the company with a gargantuan net cash position of more than $150 billion.
Even better, the business generates massive amounts of money on a recurring basis. Operating cash flow during the six-month period ended March 28 was $52.8 billion, a 46% increase from the same period last year. Free cash flow in the first two quarters of fiscal 2015 was $47.2 billion, a 44% year-over-year increase.
Share buybacks absorbed only $12 billion of that money, and dividends accounted for an additional $5 billion, so capital distributions required only 36% of free cash flow. This means Apple has more than enough financial resources to continue increasing payments during the coming years, both when looking at its cash balance and the money coming in from the business every quarter.
Why this could mean big gains for investors
Dividend yield is by far the most well-known cash-return metric; however, shareholder yield could be a more comprehensive approach to measuring capital distributions. Shareholder yield includes dividend yield, and it also adds share buybacks and debt reductions; so it measures how much money the company is distributing via different avenues.
According to data from YCharts, Apple is paying a generous shareholder yield of 5.4% on a trailing 12-month basis. This was before the company announced its dividend increase and enlarged buyback program in the latest earnings report.
Based on research from Mebane Faber's book, Shareholder Yield: A Better Approach to Dividend Investing, companies with high shareholder yield tend to outperform not only the broad market, but also high-dividend-yield stocks. According to the author, from 1982 to 2011, a basket of high-dividend-yield stocks produced an average return of 13.4% per year, comfortably beating the S&P 500 Index and its annual return of 10.96%. However, companies with high shareholder yield did even better, delivering a big gain of 15.04% per year through that period.
Also, dividend growth can be more important than dividend yield in terms of total returns for investors. Goldman Sachs calculates that $10,000 invested in non-dividend-paying stocks in 1972 would have turned to $30,363 by the end of 2014. Dividend-paying companies did much better, as the same amount of money invested in dividend stocks would have turned into $461,904.
Better yet, companies with consistent dividend growth outperformed both dividend and non-dividend-paying companies by a huge margin: A $10,000 investment in companies consistently raising dividends from 1972 to 2014 would have turned into an exponentially bigger $630,024 at the end of the period.
Apple is in a position of strength to continue increasing both dividends and buybacks during the coming years, and this has proven to be one of the simplest and most powerful return drivers for investors. When considering cash flow distributions and their impact on total returns, things are looking good for investors in Apple stock.