Apple's Dividend: 10 Years Later

Summary

• Apple Inc. may be about to announce its 10th consecutive dividend increase.
• While gravy in the present scheme of things, never underestimate the long-term impact.
• Apple, as a business, will enter a time when it needs to share more with shareholders.
• But you may want that time to be later than sooner.

Nikada/iStock Unreleased via Getty Images

I am sure most of us have looked at our childhood or adolescent photos and wondered "Wow, was that me and my friends? We sure have grown up. And our neighborhood was so different too. But Mr. Smith hasn't aged a bit, still looks strong." I had such a moment a while ago when looking up my article from 2012 covering Apple Inc.'s (NASDAQ:AAPL) first dividend payment (no one remembers 1995 right?). Using the analogy above, I can't help but notice the positive changes in:

• My own writing style (me in the photo)
• Seeking Alpha as a platform (my friend in the photo)
• Overall market conditions (the neighborhood in the photo)

And Apple (Mr. Smith in the photo) is still going strong as a company 10 years later, and more to the point, as a strong dividend growth stock. Buried under many articles and news items surrounding the latest earnings results is the fact that Apple has declared its fourth consecutive quarterly dividend payment of 23 cents. That made me realize that Apple is due for its annual dividend increase when it announces its next quarterly results in May.

As shown below, Apple has now increased dividends for 9 consecutive years, and the upcoming anticipated increase should push Apple to the revered dividend contenders list (10 consecutive dividend increases). Now, you may consider Apple a dividend contender already if you go by the fact that there have been 10 dividend increases. But I agree with Seeking Alpha's calculation below, which seems to be looking at increases past the first full year of dividend payment (2013).

AAPL DG (seekingalpha.com)

The 2012 dividend was for $2.65 a share, but obviously, that was before the company's 7:1 stock split in 2014 and 4:1 split in 2020. Factoring those splits in, the very first dividend was approximately 9.5 cents. So, the dividend has gone up 2.5 times since the re-initiation in 2012. How safe is the dividend?

• Based on forward Earnings Per Share ("EPS") of $6.12, the payout ratio is almost-laughably low at 15%.
• Readers of my articles know that I prefer using Free Cash Flow ("FCF") instead of EPS to find out dividend coverage. To find that out, all we need are the outstanding shares count, quarterly dividend, and quarterly FCF.
• Apple's total shares outstanding is 15.84 Billion.
• Using the current quarterly dividend of 23 cents, the company needs $3.64 Billion in free cash flow to cover dividends (that is, 23 cents times 15.84 shares outstanding).
• Apple's lowest, again, lowest, quarterly FCF going back to 2010 was $8.79 Billion, with a median of $18.79 Billion and mean of $19.75 Billion. Even the "COVID" quarter of March 2020 when the entire World seemed to have stopped brought in $11.46 Billion. Suffice it to say, the free cash flow strength is beyond words. Still, to arrive at a (more laughable) number, let's use the average quarterly free cash flow number of $19.75 Billion. That gives Apple an FCF based payout ratio of 18.50%.

I can "hear" many readers shaking their heads and laughing, even at how "small" or even "stingy" the dividend is. Take a look at the comments in this news link. The commenters are right, generally speaking. Apple can certainly "afford" to pay more. How much more? I've recently written about Microsoft's (MSFT) dividend coverage being so strong that it can double its dividends without feeling a pinch. But Apple is much stronger, as it can afford to quadruple its dividend and still be comfortably within the norms of an acceptable payout ratio.

AAPL DG History (seekingalpha.com)

But I see dividend growth as a marathon and not a sprint. I prefer a slowly but surely increasing stream of income as shown by Apple in the chart above. Apple's got a long way to go to make it to the two more exclusive groups shown below: Dividend Aristocrat (25 years) and Dividend King (50 years). I am fairly confident Apple already has the bases covered (financial strength, safety-first approach, and business stickiness to name a few) to join the former, but the latter is too far off in the future to predict.

Buried in the list of comments in the Seeking Alpha news item linked above is this gem below from SA user "Ministroba" who confirms the message in the graphic above is true: "The longer you hold them, the greater your wealth-building chances." Obviously, there is a great deal of survivorship bias in this, as no one could have predicted the Apple of 2023 when looking at the Apple of 2000. But knowing the Apple of 2023, it is not impossible to see the Apple of 2038 being at least as strong, if not stronger.

SA User Comment (seekingalpha.com)

Now, we may not see the returns that "Ministroba" is talking about between now and 2038, when Apple should reach the Dividend Aristocrat status. But the table below shows what investors can expect for every 100 shares of Apple owned from here. The table uses the current pre-market price of $147 and assumes a dividend growth rate of 5% and 10% alternatively. Apple's dividend growth rate has slowed a bit in recent years, but as the company continues maturing (ha!), I expect it to deploy more cash towards shareholders. However, I actually hope that gets delayed as much as possible. Why?

AAPL DG Scenarios (Author)

Does anyone know anyone more shareholder-friendly than Warren Buffett? I don't. Mr. Buffett has talked many times about retained earnings vs. paying out dividends to shareholders. As a strong believer in dividends, he rightfully does not pay one. Yes, you read that right. Mr. Buffett believes that if a company can make its retained earnings work better for shareholders in the long run than paying dividends would, then by all means, the company should retain its earnings. This is basically compound interest at work.

If Mr. Buffett is comfortable enough to have nearly 40% of his company's portfolio in Apple stock, it tells me he believes the company is safe, the dividend is safe and growing, and the retained earnings will result in better shareholder returns over the long term. I have no way of knowing the future, but I have a great gift of knowing the past with certainty. My own history shows that despite "stingy" dividends, Apple has done quite well for its shareholders since my 2012 article, as shown below.

AAPL from 2012 (seekingalpha.com)

Conclusion

As an aspiring marathon runner, I swear by the virtues of "slow and steady" vs. "crash and burn." Maybe it is a personality trait as well. So, it is not a surprise that I have no qualms about being a dividend growth investor who looks for steady and consistent payments over ones that go too fast and fail. I've enjoyed Apple Inc.'s first 10 years as a dividend growth stock (again, who remembers 1995?) and look forward to the next 10 and beyond.

Steve Jobs said, "Stay Hungry. Stay Foolish." The new Apple says, "Stay Safe. Stay Longer."

Disclosure: I/we have a beneficial long position in the shares of AAPL, MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.