Apple Will Likely Announce a Dividend Increase This Month

With Apple's (NASDAQ: AAPL) iPhone business seeming to peak recently, one way the tech giant is trying to compensate is by beefing up its services business. Indeed, the company held an event last week in which it launched four new services. But this isn't the only way Apple is trying to provide investors value beyond the iPhone. The tech company has also been focusing on bolstering its capital return program by repurchasing shares and paying dividends.

Later this month, Apple's dividend will likely see yet another boost, as the company typically updates its capital return program and increases its dividend alongside its fiscal second-quarter earnings release. Here's what to expect.

Apple store in Bangkok, Thailand

Image source: Apple.

A double-digit increase

There's a good chance Apple will increase its dividend by a double-digit percentage rate later this month.

Since Apple initiated its dividend in fiscal 2012, the payout has seen strong growth. The quarterly dividend has increased from a split-adjusted $0.38 in fiscal 2012 to $0.73 in fiscal 2018. Further, Apple's dividend has increased at an average rate of about 12% annually over the past four years, with a 16% increase last year.

There's no reason Apple can't pull off another double-digit increase when the company reports its fiscal second-quarter results on April 30, as Apple's business can easily support further dividend growth. Not only does the company have a net cash position of $130 billion, but it has generated more than $51 billion in free cash flow annually over the last four years. Free cash flow over the trailing 12 months was an impressive $62 billion. With Apple currently only paying out $13.9 billion in dividends annually, there's lots of room for upside.

Further, Apple has said it is taking action to become net cash neutral, or to have an equal amount of cash and debt, over time. To move closer to this target, Apple will need to increase its capital return program fairly aggressively, and a portion of this aggressive approach will likely include more robust dividend increases.

Given Apple's strong fundamentals and management's plan to become cash neutral, investors should look for a dividend increase similar to last year's 16% increase.

Balancing dividends with share repurchases

Of course, there are two sides to Apple's capital return program. The company also likes to return capital to shareholders through a more tax-efficient method: share repurchases. Historically, Apple has given more weight to share repurchases than to dividends. For instance, Apple spent $8.2 billion repurchasing shares and $3.6 billion paying dividends in its fiscal first quarter.

With Apple stock continuing to trade at a conservative valuation, investors should expect the company's updated capital return program to keep prioritizing share repurchases. But even with more capital going toward repurchases, a dividend increase on par with last year's 16% boost is likely.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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