Does Announcement Make Apple A Good Potential Dividend Growth Stock?

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) has finally declared a cash dividend. It just announced a quarterly dividend of $2.65 cents per share, beginning in the 4th quarter of 2012. At the current price of $600 per share, the yield works out to a paltry 1.7%. The management has also sanctioned a $10B buyback program.

This article is specifically for Dividend Growth Investors (DGI), a very popular group on Seeking Alpha. So, does this news from Apple make it a good potential DGI stock? This article lists 3 factors that are in favor of Apple in this argument and 3 factors that are not so.

Yes, Apple Has The Potential:

A) Pay-out ratio: Dividend investors usually value the payout ratio as much as the actual dividend amount. That is because the payout ratio tells us if the company is stretching itself to pay out cash. At today's EPS of $35, Apple's payout ratio will be a comfortable 30%. This gives Apple the room it needs to have a growing dividend, a critical factor for Dividend Growth Investors. Companies like CenturyLink (NYSE:CTL) have a great yield of 8% but its payout ratio is an eye popping 270%.

B) Strong Balance Sheet: Even after this buyback program and dividend announcement, Apple's cash pile on date is a whooping $43B. And guess what, the number will grow as the earnings are expected to increase as well with continuous new products (or refreshes).

C) Best Of Breed: Dividend growth investors usually favor a strong brand name and the "best of breed" stocks. When you talk about beverages, you think of Coca-Cola (NYSE:KO). When you talk about tobacco, you think of Philip Morris (NYSE:PM). In the same vein, even though a lot of dividend investors do not own Apple right now, it's hard to not think of Apple when talking about technology/consumer technology. Though, Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) have higher yield at the moment, there is no question Apple trumps them all when it comes to brand recognition and earnings power.

No, It Is Too Early:

A) History: Let us get the obvious thing out of the way. Most dividend growth investors go by the company's history of repeatedly raising its dividend. Mr. David Van Knapp, one of the most respected DGIs on Seeking Alpha, wrote this piece that a company must have raised its dividend for 5 consecutive years before it is eligible. Clearly, Apple fails here.

B) Lower Than S&P's Average: Some dividend growth investors look only for companies with yield higher than S&P 500's ~2%. At the current level, Apple does not meet that requirement.

C) Earnings Sustainability: A key reason for Apple not having a P/E ratio in line with its earnings growth is perhaps investors are worried if the company will be able to keep up its earnings growth. A 15% growth seems easy on paper and based on track record, but reality has shown us otherwise in plenty of examples before.

Bonus: Mr. David Crosetti, another famous dividend growth investor on SA, wrote his first piece back in September 2011, about the 10 commandments for DGI. Tracked against that article, Apple gets a 4 out of 6 on the commandments related to the company. The last 4 commandments are not related to the company in question.

Conclusion: As an Apple shareholder already, we are tempted to take the side that says "Yes, Apple Makes the Cut". However, as shown above, one can also argue there is a long way to go before Apple gets to enjoy the status as a good dividend stock.

Disclosure: I am long AAPL, PM, KO.