What An Apple Dividend May Look Like

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.

If you have not heard yet, Apple (NASDAQ:AAPL) reported incredible 1st-quarter FY2012 results. From the press release:

CUPERTINO, California-January 24, 2012-Apple® today announced financial results for its fiscal 2012 first quarter which spanned 14 weeks and ended December 31, 2011. The Company posted record quarterly revenue of $46.33 billion and record quarterly net profit of $13.06 billion, or $13.87 per diluted share. These results compare to revenue of $26.74 billion and net quarterly profit of $6 billion, or $6.43 per diluted share, in the year-ago quarter. Gross margin was 44.7 percent compared to 38.5 percent in the year-ago quarter. International sales accounted for 58 percent of the quarter's revenue.

What is even more impressive is the cash and cash equivalents sitting on Apple's balance sheet as of December 31, 2011: $10.3 billion, with a B. This raises a question. What is Apple going to do with all of this cash? In the current interest rate environment, one could argue that Apple is losing money every day to inflation. One of the more popular recommendations is to start paying a dividend. The company certainly has the cash flow to do so.

What would a dividend from Apple look like? Given the amount of product development and research it is engaged in, I would guess the company would be conservative with its dividend. Since Apple does like to be different, one possible avenue for the company would be to pay a variable dividend.

I looked at Apple's Statement of Cash Flows from the last five quarters (since its fiscal year starts with the 4th quarter of the calendar year). For my analysis, I am going to assume this variable dividend would be 20% of Apple's free cash flow from the quarter. Free cash flow is the cash generated by operating activities minus the payments for acquisition of property, plant, and equipment.

(Click to enlarge)

Apple Dividend Payments Based on Free Cash Flow

For the calendar year ending in December 2011, Apple would have paid out $8.72 per share in dividends. If you had bought one share on January 3, 2011, that would have been equivalent to a yield of 2.120%. If you had re-invested your dividends, you would have had approximately 1.02 shares at the end of the year and an effective yield of 2.139% (excluding taxes). The cash paid out for dividends would have totaled $8.1 billion.

You can see from the analysis above that the dividend payment would be very lumpy. If Apple were to go this route, I do not think current investors would be too upset, and this dividend would attract a whole new group of investors. Investors would have faith in Apple's management and products. With revenue and earnings growing at the pace they are growing, investors would see the dividend as a "bonus." As years go by, though, I am not sure if investors would like the variable dividend. As soon as revenue and earning growth slow, investors may prefer a traditional dividend.

What will Apple ultimately do? Who knows. Probably a combination of things. I think this variable dividend has some merit and would be a good compromise between Apple wanting to be conservative with its cash and investors wanting some of it returned to them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.