An Overlooked Reason to Buy Apple

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you put two investors in the same room, you may get three different opinions about Apple (NASDAQ: AAPL), the most widely followed and discussed stock in the market. However, one often overlooked factor is the company's dividend policy, which has the potential to become a big driver of future returns over the coming years. Here's why Apple's dividend should not be underestimated.

Show Me the Money!

Apple has more than $120 billion in cash and liquid investments on its balance sheet, to put it in perspective, only 18 companies in the S&P 500 have higher market caps than that. That's more than 20% of the company's market value, which gives an indication about how attractively valued Apple is. Even better, the company generates tons of cash on a quarterly basis, so all that money is not required for the company to finance its investments and operations.

Apple could theoretically acquire Amazon (NASDAQ: AMZN) which has a market cap of $110.3 billion and become the undisputed leader in online retail overnight. Not that the company would ever consider such a big acquisition, but it helps to get an idea about the size of Apple's bank account.

The comparison with Amazon is quite interesting, both companies have been among the most disruptive tech titans in the last decade, yet Apple has produced tons of free cash flow which the company can use on different alternatives, while Amazon needs save its money to constantly reinvest in the business.

These are two very successful companies, but with different cash flow generation capabilities. While an investment in Amazon can be described as a bet on future cash flows, a position in Apple is sustained with cold hard cash coming in on a regular basis.

At current levels Apple is yielding 1.8% in dividends, which doesn't sound very impressive, but things get much more interesting if we project those dividends into the future. Not only is the company sitting on a mountain of cash, its dividend payout is only 20% of earnings, which provides a lot of room for growing payments over the following years.

In addition to a very successful business, Apple is a cash generation machine. It's one thing to ignore that when the money is resting on the balance sheet, but when it’s translated into growing dividends year after year, it becomes much more visible.

The Slowing Growth Fallacy

Apple's dividend policy has been criticized on the basis that dividends are supposed to mean slower growth and less innovation, but that's confusing correlation with causation. Companies usually start paying dividends once they become bigger and more stable, which is usually accompanied by slowing growth rates. But dividends do not cause the slower growth.

The typical argument against Apple paying a dividend is something in the lines of comparing the Cupertino giant with companies like Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC), which have become dividend payers in the last years while at the same time they missed many growth opportunities like the mobile revolution.

But neither Microsoft nor Intel have missed mobile because of their dividend policies, both companies generate more than enough cash flows to invest in R&D and make relevant acquisitions while still maintaining their dividends. Money is sometimes needed to innovate, but it’s certainly not enough. There are some things money can't buy, an innovative management team is one of them.

IBM (NYSE: IBM) is a clear example about how a dividend policy doesn’t necessary go against growth and innovation. Big Blue has accumulated 16 consecutive years of growing dividends, including a 15% rise last year; and the company also rewards shareholders with an active share buyback program.

But none of these has stopped the company from moving forward. IBM has consolidated its position as leader in software and services for corporations over the last decade, and the company is at the forefront of innovation in different technological areas. If you have enough money to pay for innovation and dividends, there is no reason to choose one over the other.

Bottom Line

Apple's dividends will likely grow at a considerable peace over the next years, and this can provide a powerful catalyst for the stock. In the never ending dispute between Apple bulls and bears, dividends are one very important - yet usually overlooked – point for the bull camp.

 


acardenal owns shares of Apple, Amazon and IBM. The Motley Fool owns shares of Apple, Amazon.com, International Business Machines, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, International Business Machines, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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