Apple Declares Golden Apple Dividend But it's Not a Dividend Stock

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The long awaited dividend announcement came down from the Apple Tree. Apple (NASDAQ: AAPL) will skim a little bit of cash and line the pockets of investors. The dividend yield at the currently stratospheric price point is just under 2%. If you are a true dividend oriented investor this will not turn your head. Yield hounds who must surely know rising interest rates and probably inflation are just around the corner will not be truly impressed with a 2% yield.

Coupled with the cash dividend will be a share buy back to fund employee share purchase plans. A nice touch of financial engineering. Can you blame them, everyone else is doing it? This allows them the flexibility of manufacturing EPS.

The market is applauding for now. But this is not the Golden Apple as everyone contemplates. True dividend paying stocks return capital to their shareholders in a defined and systemic manner.  Dividend levels, while not contractual obligations, become matters of trust. If, as and when a publicly traded company's dividends are reduced or canceled, share values generally erode deeply reflecting the drastically eroded business model. Dividend payout ratios are usually established in advance. Apple has not established a dividend payout ratio per se. The dividend is being justified as something that will not erode the pile of cash that Apple has accumulated. No one is looking at dividend coverage ratio's and assessing business risk. So therefore Apple is still not a dividend stock in the view of flinty eyed dividend investors.

Apple stands at a crossroads. It has enjoyed incredible success both financial and marketing. Basically it has been able to eat its competition and not even burp as it goes to the bank yet again. Apple is still a long ways off the day it may have to consider curtailing its dividend. But once a dividend is established dividend curtailment is on the table as risk. Currently the dividend is small and seems like a throw away concession to shrill investors who can only spell dividend. But if Apple ever had to adjust the dividend downward or even skip it the market would go beserk. Humpty Dumpty would have fallen off the wall.

This ladies and gentlemen is how the financial skeptic grew hair. In the meantime you would not set your stock selection screens for a 2% dividend yield or less and then hit the buy button.

Microsoft (NASDAQ: MSFT) with 50% of Apple's market cap has a dividend yield of approximately 2.5%. Microsoft's cash balance is around $52 Billion. Yet Microsoft is starting to be viewed as a senior with an established cash flow base from its Office Product and enterprises services. There is real pressure on Microsoft to act more like a utility and pay up. Microsoft has made a few acquisitions and is probably glad the Yahoo thing (NASDAQ: YHOO) didn't really work.

Apple has had to eat its own babies to develop new compelling products. Microsoft has eaten the neighbors children several times over and can point to a more entrenched product line. Apple is one marketing failure away from disturbing their slavish clientèle. Microsoft can launch Vista and shrug off the problem.

The real comparison is IBM (NYSE: IBM) Big Blue currently has a dividend of under 1.5%. The market cap is just behind Microsoft and the cash balances are nowhere near what Apple or Microsoft have to offer. In short they are a dividend stock. The CFO  needs to watch earnings and cash flow to ensure he can cover the dividend. Apple simply is not in that category.

Which is why Apple has Golden Apples but not Golden Dividends.

George Gutowski writes from a caveat emptor perspective.

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