With Ford's (F) announcement today to restore its dividend, investors are wondering what other companies might restore or even initiate a dividend. After all, we've recently seen long-time non dividend payers like Starbucks (SBUX) and even Cisco (CSCO) finally start returning some cash to share holders. Could we finally see a dividend from one of the biggest and most popular companies in the world, Apple (AAPL)? Let's examine this idea further by asking three questions: Could, Should and Would Apple pay a dividend and then see what said dividend might look like.
First of all, could Apple start paying a dividend to shareholders? Unquestionably. Even though Apple is a tech company and still growing, earnings are stellar. For 2011, it earned $27.68 a share. Unlike any other number of tech or consumer products companies, earnings actually grew over the 2008 recession. And with no debt and (get this) 26 billion dollars sitting on the balance sheet, it is in an outstanding position to support a dividend and still be very financially secure.
Next, should Apple pay a dividend? This is more subjective, but here again the answer is yes. That 26 billion dollars is earning fairly close to nothing as is. Certainly most shareholders could find a much better use for it. Additionally, I've often felt that large amounts of cash on a balance sheet are dangerous to companies because, just like regular consumers, board members have a tendency to be careless with cash. Too much cash often leads to ill-advised acquisitions, inefficient expenditures, arrogance and many other foolish uses of money.
Also, dividends in tech companies have become far more common. Microsoft (MSFT), Cisco, Intel (INTC), Hewlett Packard (HPQ) and IBM all pay dividends. Apple would likely benefit in status from standing with its peers in this regard. Dividends also attract more investors and could very well lead to higher valuations for the stock.
Finally, would Apple pay a dividend? If Steve Jobs were alive, I would say absolutely not. I believe that he felt Apple was his company, and not the shareholders, and was more interested in pursuing his own agenda much of the time. For one thing, he had an enormous ego and it seems likely to me that he enjoyed comparing his company's cash against other rivals, especially Google (GOOG) and Microsoft. Furthermore, he had a vision to “crush” Android and I believe this large amount of cash played into those plans.
Please don't misunderstand, when it came to taking technology and making it useful and attractive and ground breaking, Steve Jobs was a genius. But I don't believe shareholders were much of a concern for him. With Tim Cook taking over the company, it is far more likely now that Apple will pay a dividend. I don't believe he has his personality as tied into the company and he will be more willing to take shareholders' interests in mind.
When those three questions are answered, what might an Apple dividend look like? I examined the payout ratio of other tech few companies measured below.
Approximate payout ratio of earnings for other large-cap tech companies:
- Microsoft – 25%
- Cisco – 10%
- IBM – 20%
- Hewlett Packard - 10%
Since Apple is not as mature as either Microsoft or IBM, but is more successful than Cisco or HPQ, let's take a 15% payout ratio as a start. 15% of $27.68/share earnings gives $4.15/share for a yield of about 1.1%. This dividend would be extremely sustainable, and while not a yield currently to light the world on fire, it is not exactly dismal either.
With Apple coming under a slightly new direction, the likelihood of a dividend has become much higher. It is a step it could easily take and should take. A dividend would attract even more investing interest in a very popular company. Shareholders want it and would benefit, the cash is doing little sitting in the bank and a dividend would be a statement of success that other tech companies have taken. I suspect Apple will take this direction in the near future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.