Apple Inc. (AAPL) is having an identity crisis. The iconic Silicon Valley heavyweight desperately needs to become a tried-and-true dividend stock -- a steady Eddie that cuts shareholders a hefty check four times a year.
Something like Microsoft Corp. (MSFT) and Intel Corp. (INTC).
Yes, Apple already pays a dividend. That's true. But it's also a shamelessly insufficient dividend. While the 2.1 percent yield may not seem like a total skimp job on the surface, it most assuredly is.
There are a few reasons the current dividend just doesn't cut it -- and why AAPL stock owners would be best served if the company moved to dramatically increase the dividend sooner rather than later.
A modest increase of, say, 50 percent, conservatively, would seem reasonable at the outset.
AAPL has hundreds of billions in cash. Let's start with the basics. Apple is liquid. The Cupertino, California-based techie has a whopping $231.5 billion in its bank account.
And yet last quarter Apple only spent $13 billion on capital return programs via stock buybacks and dividends. A pesky $3 billion of that came in the form of dividends.
That's a questionable way to structure its capital return program, says Eric Ervin, CEO of Reality Shares, an ETF sponsor focused exclusively on dividend growth.
"A buyback program flatters per-share earnings numbers and supports the company's share price," Ervin says. But "a dividend program would return cash directly to shareowners and enable them to purchase more shares if they chose."
Don't get it twisted -- $13 billion in one quarter is still a lot of money to put back into shareholders' pockets. But it's peanuts compared to what Apple could be spending.
Apple's payout ratio is just 26.6 percent -- a pittance in relative terms. While the absolute numbers astound, analyzing dividend stocks is all about relative comparisons. One metric in particular, the dividend payout ratio, is especially useful in gauging how much room a company has to boost its dividend.
To compute the payout ratio, take the dividends Apple pays annually ($2.28 per share) and divide it by its trailing 12 months' earnings ($8.56 per share). AAPL has a payout ratio of 26.6 percent.
While on the surface MSFT's 2.5 percent dividend is comparable to Apple's 2.1 percent yield, using the payout ratio exposes just how different the shareholder capital return philosophies are. Microsoft's payout ratio is 68.6 percent
And Intel, another mega-cap tech stock returning billions to its shareholders, returns 50 percent of its net income to shareholders, rewarding them with a 3 percent dividend.
AAPL could literally double its dividend. Apple currently pays a 57-cent per-share dividend each quarter. Michael Palumbo, Third Millennium Trading founder and author of "Calculated Risk," thinks AAPL will hike that to 65 cents per share two quarters from now, when the company historically announces changes to its dividend policy.
That would represent a 14 percent dividend hike, modestly higher than the 9.6 percent hike declared in April.
Still, AAPL "could support a dividend much higher than this, as high as $1 per share" each quarter, Palumbo says. He considers such a raise -- it comes to 75 percent -- unlikely, though. Tim Cook & Co. will hold back on an aggressive dividend hike "to give the firm flexibility to have further raises in the future and in case growth prospects unexpectedly improve," Palumbo says.
That affects income-focused investors. Apple could comfortably double its dividend -- from 57 cents to $1.14 per share each quarter -- and its payout ratio would only be about 53 percent, roughly in-line with Intel's and far lower than Microsoft's.
At the $1 quarterly dividend Palumbo suggested, Apple's dividend payout ratio would be 46.7 percent, leaving it plenty of extra cash to deploy if, miraculously, a huge growth opportunity presented itself and Apple needed to invest heavily.
With growth in the rear view and rates so low, it's about time to share the dough. Imagine an immature child in a sandbox, greedily piling up a cache of plastic shovels and buckets that will never be used.
Apple is the Wall Street equivalent of that obnoxious child.
"It is completely absurd why Apple would store this much cash," says Ron Weiner, certified financial planner, managing director and partner of RDM Financial Group at HighTower.
"If I was their financial planner, I would tell them that you don't have to earn much on that money to make a material difference to their long-term growth," Weiner says. "You would think that they can find some opportunities that result in better returns than cash."
While the majority of Apple's $231.5 billion cash hoard is tied up overseas (repatriating it would incur about a 40 percent tax hit), Apple can easily tap the credit markets and borrow money at dirt-cheap rates to pay dividends and buy back stock.
In fact, Apple has been doing that more and more in recent years as shareholder outrage over its dividend, or lack thereof, has increased. But AAPL needs to do more. It needs to face the fact that its days as the sexiest growth company in Silicon Valley are over.
Sales of Apple's flagship iPhone, the cash cow of the most profitable company on the face of the planet, fell in consecutive quarters earlier this year, doing so for the first time ever.
Apple, which grew revenue by 43 percent in fiscal 2012, is expected to post a nearly 8 percent sales drop in fiscal 2016.
When companies reach the mature phase of their life cycle, they're supposed to invest less in growth and more in capital return programs. Apple is mature now, and it's time to start acting like it.
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