Please ensure Javascript is enabled for purposes of website accessibility

Apple CEO Promises to Increase Dividends: What You Need to Know

By Andrés Cardenal - Feb 29, 2016 at 12:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple is positioned for sustained dividend growth, and this can be a major return driver over the long term.

Image source: Apple.

Apple (AAPL 1.62%) stock pays a modest dividend yield, and the company comes well behind other big tech players such as Microsoft (MSFT 1.07%), IBM (IBM -0.05%), and Cisco (CSCO -0.09%) in that regard. Make no mistake, though, Apple is positioned for big dividend growth in the years ahead, and this has huge implications for investors.

Small dividends and big room for growth
Apple, Microsoft, IBM, and Cisco are fairly different companies, operating in their own sectors, and with their particular weaknesses and strengths. On the other hand, the four companies also offer some important similarities for investors. Apple, Microsoft, IBM, and Cisco are among the biggest and most stable tech corporations in the world, and they look quite attractive from a dividend investing perspective.

Apple comes well behind its peers in terms of dividend yield. The iPhone maker is yielding 2.1% at current prices, while Microsoft pays a dividend yield of 2.8% and both Cisco and IBM offer much higher yields in the neighborhood of 3.9%.

However, it's of utmost importance to note that Apple has enormous room to raise dividends in the future. Apple has a dividend payout ratio in the neighborhood of 23% of earnings forecasts for the current fiscal year, this is much lower than the payout ratios offered by comparable tech companies: Microsoft distributes nearly 52% of earnings as dividends, IBM ha a payout ratio around 39%, and Cisco is in the area of 36%.

Apple CEO promises to sustain dividend growth
Apple reinstated its dividends in 2012, and the company has raised payments every year since then. Speaking at the company's annual shareholder meeting last Friday, Apple CEO Tim Cook said that management is committed to increasing dividends annually, since Apple typically announces its dividend increases when it reports earnings for the March quarter, chances are that Apple's next earnings report will include a new and enlarged dividend.

Not only is Apple's dividend relatively low in comparison to the company's earnings, cash flows also provide enormous room to increase dividends in the future. Apple produced $27.5 billion in operating cash flow last quarter, and capital expenditures consumed $3.6 billion of that money, leaving Apple with almost $24 billion in free cash flow. Dividend payments during the period amounted to less than $3 billion, or a remarkably low 12.5% of free cash flow. In addition, Apple is sitting on a gargantuan cash hoard of nearly $216 billion in cash and investments on its balance sheet.

Management is clearly committed to raising dividends over the coming years, and Apple has more than enough financial resources to put its money where its mouth is, so the company has the willingness and the ability to sustain dividend growth.

Why dividend growth matters
Dividends provide predictable cash payments to investors, and this can be a major advantage to keep in mind when analyzing investment decisions. Even more important, dividends say a lot  about the health of the business. When a company has the financial strength to sustain dividend growth over the years, this shows that the business is healthy enough to produce consistently growing cash flows over time.

Goldman Sachs measured the returns of different kinds of companies based on their dividend policies over the long term, and the results are quite interesting. Dividend-paying stocks typically perform much better than stocks paying no dividends, and companies with consistently growing dividend payments materially outperform both those with stable dividends and companies paying no dividends at all.

According to this research report from Goldman Sachs, a $10,000 investment in non-dividend stocks on Jan. 31, 1972, would have turned into $30,316 at the end of 2014. The same amount of money invested in dividend-paying stocks would have an ending value of $461,904, while investing in companies starting new dividends or increasing their dividend payments every year would have resulted in a much bigger ending capital of $630,024.

Apple has the financial strength to continue increasing dividends in the future, and CEO Tim Cook has recently confirmed that the company is in fact planning to raise dividends on an annual basis. Considering the historical evidence about the positive impact of consistent dividend growth on investment returns, this is clearly a major positive for investors in Apple stock.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$141.12 (-0.05%) $0.07
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$259.58 (1.07%) $2.75
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$42.60 (-0.09%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.