Why Apple Could - And Should - Start A DRIP

Apr. 5.12 | About: Apple Inc. (AAPL)

Last month Apple announced that it would begin paying a quarterly dividend of $2.65/share. That works out to a yield of less than 2%. Its last dividend was paid in 1995. And that is a long time between paydays for shareholders. The decision to share part of its almost $100 billion cash horde with stockholders is a clear sign of change at Apple since Timothy Cook became CEO after Steven Jobs stepped down.

I can remember a recent TV interview with Warren Buffett, who stated that he had received a call from Jobs asking what Apple should do with its cash. Jobs, who died from pancreatic cancer in October 2011, had long resisted paying dividends and buying back shares, saying he preferred to hold onto the money for possible acquisitions or other investments.

Mr. Buffett never really said what he would do with all that cash. However many analysts believe that while Apple's plan to pay a dividend and buy back shares will slow the growth of Apple's cash hoard, it would not reverse it. Even with the dividends and stock buybacks, Apple's total cash balance going forward would grow by more than $30 billion a year.

Nevertheless, the first real payout will come in July 2012, at the onset of Apple's fiscal Q4. This action should attract a whole new class of investors to Apple stock as many investment funds have rules that prohibit them from investing in a stock that does not pay a dividend. Plus, a DRIP encourages shareholder loyalty. That said, I am predicting before the end of this year Apple will also initiate a Dividend Reinvestment Plan for its shareholders through Computershare, its transfer agent.

My reasoning for this prediction is simple. Other large, cash-rich companies that started to pay a dividend have seen fit to initiate a DRIP. And Computershare, which already handles several hundred other DRIPs, will surely be pushing Apple to follow suit. Most recent case in point: Amgen (NASDAQ:AMGN) made its first dividend payment of 36¢ in March 2012. It had a cash horde of over $20 billion. It has recently started a DRIP. Then there is Cisco (NASDAQ:CSCO), another company with a great deal of cash assets, which shortly after announcing it would begin to pay a dividend started a DRIP. It was that combination of a dividend payment linked with a DRIP that pushed me over the edge to open my checkbook and buy Cisco.

Going back a little further, I could point out that Starbucks (NASDAQ:SBUX) started a DRIP shortly after announcing its first dividend payout in April 2010. And going back even further to December 2009, Dr Pepper Snapple (NYSE:DPS) rolled out its DRIP right after announcing its first dividend payment. However, neither Dr Pepper nor Starbucks were as cash rich as Apple, Amgen or Cisco.

Disclosure: I am long CSCO.