Sectornomics: Technology

Will Apple's next blowout surprise be its dividend?

Tim Mullaney, special to
Trillion dollar Apple?

With a tough quarterly earnings season looming and some dividend stalwart energy companies slashing their payouts, analysts are eagerly awaiting an update from Apple on its plans to hike its stock dividend.

In each of the last two years, Apple has raised its dividend in April.

"People are expecting at least an update [from Apple]," said Scott Kessler, S&P Capital IQ analyst. "Based on past experience, it would be reasonable to expect that in the last week or two of April.''

With nearly $180 billion in cash and securities on the company's balance sheet at the end of 2014, Apple is likely to raise its $1.88-per-share annual dividend. The only question is by how much. The rally in Apple shares, up more than 60 percent in the past year, makes the dividend question a difficult one to answer.

When it began paying dividends in 2012 after a 17-year hiatus, Apple's quarterly payout gave the stock a 1.76 percent yield. In 2013, the company boosted the yield to just above 3 percent.

In 2014, Apple raised the dividend 8 percent, but shares had gone up more, so even with the increase, the yield only got to 2.5 percent. The continued rally in Apple stock has pulled the yield on that dividend down to 1.5.

Kessler thinks Apple will raise the dividend by as much as 8 percent, to 15 percent. If Kessler is right, and at its current stock price around $125, the yield would go to between 1.6 percent and 1.7 percent.

Some investors might think that's downright stingy of the tech giant, especially with shareholders pressing Apple to return more cash.

Dado Ruvic | Reuters

For one, it's less than high-yield tech companies such as Microsoft (2.9 percent) and Intel (3.1 percent), and less than the average for the Standard & Poor's 500, which pays about 2.05 percent, according to S&P Dow Jones Indices. The yield would also stay lower than the 2.5 percent Apple targeted itself in 2014.

That's why, when analyzing the same facts, other analysts are expecting a much more aggressive dividend hike.

It's the same as earnings blowout talk. Everything has to be a blowout with this company. The craziest thing is that a 50 percent dividend increase is feasible.
Howard Silverblatt
senior index analyst at S&P Dow Jones Indices

"Lots of people are expecting a big increase from them in April," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, adding, "They are going to increase it. It's just a matter of how much."

In the estimation of RBC Capital Markets analyst Amit Daryanani, the "how much" could run as high as a 50 percent dividend hike. Apple is likely to generate $65 billion in free cash flow in 2015 and can return all of it to shareholders through buybacks and dividends, Daryanani said. In all, Apple may return as much as $200 billion to shareholders over the next three years.

"The cash position is as large as Disney's market cap," Daryanani said. "The $65 billion in cash flow is after they spend $7 billion on research and development. It has the financial flexibility to do anything it wants—Apple TV, developing a car, the next phone.''

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Fifty percent would put the yield around 2.25 percent (based on the current stock price). That's still lower than Apple's 2013 target, as well as being well below the level of Intel and Microsoft. And that's why the RBC analyst thinks it is a reasonable increase.

For Apple to pay out 2 percent of its $725 billion market value would cost about $14.5 billion a year, or less than a quarter of its operating cash flow last fiscal year, but $3.4 billion more than it spent on dividends in fiscal 2014. Matching Intel's payout would cost about $24 billion.

Silverblatt said he's heard market chatter of a dividend hike even greater than 50 percent. "It's the same as earnings blowout talk. Everything has to be a blowout with this company," he said, adding, "The craziest thing is that a 50 percent dividend increase is feasible."

Silverblatt doesn't make projections for S&P about the Apple dividend—that's Kessler's territory—but he said that at $16.5 billion, Apple can afford it. He pointed to the $11 billion in dividends last year and the $45 billion in buybacks as a sign that there is definitely room to shift from one to the other and add more of a steady income component—buybacks tend to vary more over time and based on earnings and options commitments—but it's a question of how much of a cash commitment Apple wants to make.

"There's definitely more pressure because the buybacks are up so much," Silverblatt said, adding, "If they put out a single-digit dividend increase, that will disappoint people."

Tech's love-hate relationship with dividends

In general, tech companies are much more likely to pay dividends than they used to be, though there is still a gap between them and the rest of the market, Silverblatt said. Almost 70 percent of S&P 500 technology companies pay dividends, averaging 2.05 percent. Other S&P 500 companies with dividends pay 2.39 percent—about 86 percent of non-tech S&P 500 companies pay dividends.

Tech companies have tripled their contribution to overall dividends since 2004, according to S&P. "Up and down the line, more companies of all sizes are paying them," Silverblatt said.

A reason Apple may not be as aggressive as some would like with its dividend stance is that like most companies, Apple still prefers buybacks to dividends—it bought about $44 billion of its own shares last year.

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Apple didn't return a request for comment about its dividend plans.

Buybacks are more popular because companies find them to be more flexible, Kessler said. While any company would risk bad publicity if it cut its dividend amid a slow patch in its business—the energy sector is a good example of that right now—the market doesn't punish companies for pausing buybacks to conserve cash. In Apple's specific case, most of its cash and securities are held abroad, giving it a tax incentive to avoid returning the money to shareholders in the U.S. But those problems are easy to solve, Kessler said.

Apple borrowed $18 billion last year and could easily use borrowed money to return more to shareholders, while reinvesting overseas cash in the growth of its Apple stores and other businesses worldwide, Kessler explained. "There's a way of getting around the taxes on repatriated profits,'' he added.

"They can get money any way they want; it's how much they want to do it and how much pressure they are under," Silverblatt said.

Critics of big buybacks argue that they are an inefficient, unreliable way to increase shareholder returns. The 15 U.S. companies that reduced their share count most sharply through buybacks last year have by 9 percentage points since 2013, according to a USA Today analysis of S&P Capital IQ data. Those companies included technology firms Juniper Networks, Motorola Solutions and Citrix Systems.

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For investors, it's important to keep in mind that as a technology growth stock, the core of total returns at Apple remains how fast the business boosts sales and profits. In the quarter that ends this week, analysts think Apple earned $2.12 a share on $55.46 billion of sales, up from $1.66 a share in the same quarter last year. Sales are expected to rise 21 percent, led by the introduction of the iPhone 6 line last September.

"If you like the stock, it's a nice kicker," Silverblatt said.

The other dividend elephant in the room

Apple recently took the crown from Exxon Mobil in churning out the highest quarterly profit in history, and long ago it left Exxon in the dust as far as king of market value. But now the tech giant's increasing dividend is making Apple look like more of a sure thing than the international oil and gas giant.

That's in stark contrast to recent fears that Exxon Mobil—which has raised its dividend for 32 consecutive years—could be forced by the oil crash to reconsider extending its streak. Exxon almost always makes its annual dividend increase announcement in April, just like Apple's recent history.

Last week, S&P senior index analyst Howard Silverblatt published a note on the Exxon Mobil dividend question. But truth be told, Silverblatt doesn't think Exxon will actually cut, or even keep flat, its dividend. "It's so inherent in Exxon," he said. As well as what big institutional investors, such as pension funds, have come to expect. "Thirty-two years ... that's a heck of a lot of culture to walk away from," Silverblatt said.

The S&P analyst thinks that Exxon would cut back on capital spending before touching its dividend or buybacks—the oil giant is also the post child for buybacks, with $220 billion over the last 10 years spent on buybacks.

"Cutting the dividend would be a major, major issue," Silverblatt said. "It's not just the actual dollars, it's the message it sends about the future and cash flow, and industry cash flow."

Yield level also makes a difference. Exxon's dividend yield is 3.2 percent versus other energy stocks that feature much higher yields—as high as 19 percent in the case of Transocean and 11 percent in the case of Ensco. Both of those energy companies just slashed dividends by 80 percent. A $2.88 dividend from Exxon, or 3 cents increase per quarter—would be $503 million.

There are only six companies that pay more than $8.8 billion annually in dividends, and Silverblatt expects Exxon Mobil to remain one of them.

By Tim Mullaney, special to