Apple (AAPL). The perfect company. The (near) perfect stock.
Apple made a shareholder friendly overture by splitting its stock.
I hope other companies with relatively high stock prices mimic Tim Cook and, now, Elon Musk of Tesla (TSLA).
While the split benefits investors across the spectrum of age and experience, Apple did it to make its stock “more accessible to a broader base of investors.”
Now it’s time to crush it just as hard for long-term investors, particularly those on the prowl for income. While there’s no question Apple has delivered for shareholders, there’s no good reason why it can’t do even more and become the perfect stock across investing styles.
Apple Can Significantly Increase Its Dividend
It doesn’t take a math expert to run the numbers – Apple can afford to increase its dividend substantially.
Here’s an assessment of the company’s cash situation and how it returns cash to shareholders from Apple’s most recent quarterly report:
During the nine months ended June 27, 2020, cash generated by operating activities of $60.1 billion was a result of $44.7 billion of net income, non-cash adjustments to net income of $13.5 billion and an increase in the net change in operating assets and liabilities of $1.8 billion. Cash used in investing activities of $9.8 billion during the nine months ended June 27, 2020 consisted primarily of cash used for purchases of marketable securities, net of maturities and sales, of $2.0 billion and cash used to acquire property, plant and equipment of $5.5 billion. Cash used in financing activities of $65.5 billion during the nine months ended June 27, 2020 consisted primarily of cash used to repurchase common stock of $55.2 billion, cash used to pay dividends and dividend equivalents of $10.6 billion and cash used to repay or redeem term debt of $12.6 billion, partially offset by net proceeds from the issuance of term debt of $10.6 billion and proceeds from repurchase agreements of $5.2 billion.
And Apple recently tapped the debt markets again, this time to the tune of $5.5 billion. It uses this money, in part, to fund its buyback and dividend policies.
Apple has committed to continuing its 8-year streak of dividend increases (see the above-linked quarterly report). That’s fantastic. But imagine if it doubled its current dividend payout. It could completely fund such a move by shaving some cash from its repurchase program.
You can come up with your own math to show how Apple can comfortably double its dividend today and increase that dividend by 5-to-10 percent annually thereafter.
I tend to think about these things from standpoints of perception and the material impacts they would have on current and prospective investors.
Apple Would Become The Perfect Stock
In the eyes of many, Apple announcing the doubling of its dividend today alongside the promise it will continue to make more modest annual increases makes it the perfect stock. The thought process behind this is really no different from executing the stock split.
If you’re a growth and income investor, Apple has supplied a ton of the former and a bit of the latter. If you’re ready to take some profits, because maybe you’re concerned the stock has run too far, too fast, an increased dividend might keep you in the stock. It might even prompt you to add more on dips.
If you own 100 shares of Apple today, you’re generating $328 of annual income. Soon you’ll own 400 shares of Apple at an annual dividend of $0.82, good for the same $328 in annual income (see the split really doesn’t change the numbers!).
Fellow Seeking Alpha contributor Bill Maurer recently suggested Apple up its quarterly dividend by $0.005 to make it $0.21 rather than the fractional $0.205. This would increase the annual payout to $0.84.
That half cent hanging off of the end of the quarterly dividend doesn’t matter or bother me much. I’m certainly not going to rip Apple if it keeps its dividend where it’s at. But how much more powerful and meaningful would it be if it took this opportunity to double down.
Just as powerful and meaningful as the stock split.
As the split shows younger, new, and a “broader base” of investors that we’re looking out for you, it shows shareholders who rely on or seek income alongside growth that we have your best interests in mind. This perception alone – which, again, Apple could pull off without any material impact to its financial health – would literally (think Rob Lowe on Parks & Rec) make Apple the perfect stock for investors across the spectrum.
Impact On Your Portfolio
Using 400 shares as the marker, a doubled dividend of $1.64 would yield $656 in annual income.
That’s substantial when you consider the power of compounding. Over a ten-year period, you would roughly double your annual dividend income on 400 shares of Apple.
The exact amount depends on the share price and annual dividend growth. And I ran these scenarios without considering incremental monthly investment with new cash into Apple stock.
For example, at a yield of 1.4 percent with 5 percent annual dividend growth and a stagnant stock price, you’ll see annual dividend income of $1,184 by year ten. Throw an extra $500 a month into Apple and that number increases to $2,467.
Of course, assuming a stagnant stock is imperfect because you buy more shares with dividend payments and new cash when Apple stock is low and fewer shares when it’s higher. And it’s not going to simply even out. But you get the drift.
Anyway you slice it, it’s a shareholder-friendly move to effectively give investors the opportunity to double the income they can generate from your stock.
If Apple’s stock price continues to increase (and I think it will), we can assume the metrics necessary (increasing revenue and profits, increasing cash flow, etc.) to even more aggressively increase the dividend annually will be in place. This will continue to keep Apple attractive from both growth and (though relatively modest) income standpoints.
Apple will be a dividend aristocrat someday. It can act like one right now.
The stock split satisfies the urges of younger investors. The increased income keeps the ones who have presumably been around longer or have more firepower happy and engaged. I don’t see how Apple or its shareholders can lose with this combination.
For the longest time, I was against Apple paying a dividend. I’m so embarrassed by this that I won’t even link to the article.
At the time, I was resistant to Tim Cook because I loved Steve Jobs so much. I don’t think I was alone.
Fast forward to 2020 and I think I love Cook more than I did Jobs.
Tim Cook has not only done an incredible job running Apple, but he has made it his own while respecting Jobs’s memory. And, from what I can tell from the outside, he has done more for Apple from a social perspective than Jobs did or probably ever would have. There are lots of people in this world who Tim Cook serves as an amazing role model for. Just as many, if not more than Jobs. He just seems like a good guy who wants to make the world a better place. (I am presently rewatching Silicon Valley on HBO).
But that aside, I was against the dividend because I thought it signaled Apple had run out of ideas. That it wasn’t innovating. Why would it return cash to shareholders when it needed to have cash on hand to fuel and fund innovation and be ready, at a moment’s notice, to make a massive acquisition?
As it turns out, Apple’s biggest mistake in the Tim Cook era, was the $3 billion buy of Beats Electronics. That money would have been better spent on dividends!
The larger point being Apple has gotten to the point where it can safely and effectively do both – return cash to shareholders at a more aggressive pace and fund growth and innovate with the best in tech.
We’re also at a point where consumers are hooked on the iPhone and, just as they have less reason to upgrade, they have very little reason to switch.
Apple will invest in Services – in content and the platforms that deliver, drive, and market that content – to propel a significant chunk of its future growth. That’s not to say it won’t spend money on hardware innovation. It’s just to say that we’re probably in a period where we’re not necessarily feeling like we need to adapt the latest technology because what we have is great enough and advances in smartphone tech (particularly from an everyday use standpoint) aren’t as amazing and must have as they were in the earlier days of iPhone.
Apple is a great company. It’s also a great stock.
As an investor more and more obsessed with income, another shareholder-friendly move focused on the dividend, would make it the perfect stock in the growth section of my income portfolio.
Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.