Thursday, March 22, 2012

Apple's Dividend Potential

Sorry for the lack of posts recently, March Madness dominated my time and attention the past week.  Its not like much happened since then... except for the fact that the largest company in the U.S. finally decided to pay a dividend.  I'm sure many of you saw or heard that, starting in September, Apple (AAPL) will begin paying a quarterly dividend of $2.65.  This would equate to $10.60 / year for a current dividend yield of 1.8%.

I received emails from some of you asking what I thought about this and if I believe Apple is a good dividend growth stock to buy.  My initial thought, its about time they paid a dividend!  Apple was sitting on over $97 billion in cash and its pile of money was growing every quarter.  I'm all for them reinvesting money back into the company to continue to innovate and stay ahead of the competition, but that cash hoard is wildly excessive.  Of course part of the problem is that a lot of their cash ($64 billion) is held offshore.  If they were to bring any of that cash back into the U.S to use as a dividend, they would have to pay 35% tax on it (this is a very stupid law, but I won't get into it now).  But they've still got billions here at home and are making billions more every month so its nice to see them giving some back to the stockholders.

The question of whether or not its a good dividend growth stock, well that remains to be seen.  It appears that Apple has started their dividend low enough to where they can easily afford to increase their payments in the future.  The new dividend will distribute about $10 billion a year to shareholders. Apple is expected to generate more than $40 billion in cash in fiscal year 2012.  This would give them a dividend payout ratio of around 25%.  If they wished to keep the payout ratio at 25%, then the dividend growth rate would be tied to the income growth rate.  If that were the case, I believe we could easily expect double digit dividend increases for several years.

I'll admit, if Apple's stock price dropped to where it was at the beginning of 2012 ($400/share), I'd be tempted to buy.  But for now I'm going to invest in stocks who have proven to be committed to paying and raising their dividend.  Considering it took Apple this long to decide to pay one, I'm not sold that raising their payout each year will be a high priority for their Board of Directors.  Its still an intriguing situation that I intend to keep my eye on.

Disclosure: I have no position in AAPL at the time of this writing.

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