Apple, Inc. ( AAPL ) shares have continued to plummet recently, sending shock waves through the market. One possible solution for the company is to double its quarterly dividend payout and attract a whole slew of income-oriented investors.
It was not too long ago that Apple was trading around $700 per share, but a lot has changed in the past two months since those all-time highs. Now the company is trading in the mid-$500 range. With this -20% drop, Wall Street insiders are mixed about the potential for this mega-cap company; some are weary of the weak outlook for Apple in 2013 while others see substantial potential growth in the next year. Analysts are struggling to determine what position to take on this stock. This conflict of ideas is one reason why the stock has dropped as much as it has. Now Apple needs to find ways to bump up its shareholder value. How, you ask? Dividends, of course!
In August of 2012, for the first time since the mid-90′s, Apple paid a dividend to its investors. This move signaled a sign that the company was moving away from its former place as a strictly growth-based company, to a more mature place in the markets. Though the dividend was a good first step toward the future, the recent sudden drop in price shows the potential vulnerability in the company. Previous market giants have experienced similar falls. Without adapting to the change in market valuation, it could result in even steeper depreciation. The company needs to reevaluate itself to see that it has not taken the necessary steps to ensure a steady stream in appreciation. The initial dividend was a good start to position itself for the future, but it did not go far enough. The problems could be solved if Apple were to double its dividend immediately.
The Value Proposition
Apple's annualized dividend payout of $10.60 per share gives the stock a current dividend yield of about 1.97%. If Apple could double its dividend to a yield of around 4%, it would nearly put it in line with income investing stalwarts like Con Ed ( ED ) and Bristol Myers ( BMY ), but still trailing the 5%+ yields of top income plays like AT&T ( T ) and Altria ( MO ).
Such a move would immediately make Apple shares attractive to dividend investors who previously have avoided it due to its low-ish yield. A floor under the stock price would likely develop with a ~4% yield, however, given the influx of income-oriented long-term investors.
They Can Afford It
With a current annualized dividend of $10.60 per share versus an average 2013 analyst EPS estimate of $50.30 per share, Apple's current dividend payout ratio is just 21%. This statistic is in line with a company that is more focused on investing its revenue back into the company for greater growth and innovation. That is not the place that Apple should be in right now; it is in a position where it needs to be a shareholder-focused company to sustain positive value in the future. Increasing the dividend would help amend these problems.
Apple does not have to worry about affording this increased dividend either. Doubling the payout ratio to 42% would pose few issues to the company's balance sheet because they have enough cash on the books to make it work. As of its 2012 financial reports, the company had $101 billion in retained earnings - enough to pay this new dividend for over five years, even if the company made zero money during that period. Obviously, Apple does not to worry about not making money over this time period; analysts expect Apple to make $47 billion in profit in 2013, and $55 billion in 2014.
How High Can its Dividend Go?
Why stop at doubling Apple's dividend? If the company wants to truly make the transition into a shareholder-focused entity, it could increase its dividend payout ratio to 50%, 60%, or even 70%. The money Apple currently has stagnating in foreign accounts does nothing to add value to the company or help its shareholders.
An increase in dividends also steers the company away from unnecessary reinvestment and capital expansion in an increasingly competitive market. Apple has thus far avoided any disastrous acquisitions (think Yahoo! buying Broadcast.com, or any recent Yahoo! acquisition for that matter), but a dedication to strong dividend raises could help keep management from making any foolish choices in the future.
Prediction: if Apple increased its dividend payout to a yield level of 6% yield or higher, it may very well become the favorite choice for both income investors and growth investors. Who wouldn't want to own a piece of the largest company in the country (in terms of market cap) that offers a yield most stocks can only dream of?
The Bottom Line
Apple's share price could be buoyed and bolstered almost instantly with a much higher dividend payout. This potential increase in income for investors will bring a slew of new buyers. The company can afford it. People want it. It makes sense. Why not just do it?
Apple, Inc. ( AAPL ) is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.4 out of 5 stars.
Created by Dividend.com