Is Apple a Fruitful Dividend Play?

By Peter Pham - September 5, 2012 | Tickers: AAPL, CSCO, DELL, GOOG, HPQ | 0 Comments

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Now that Apple (NASDAQ: AAPL) has broken the record for the largest market cap in history and it may be time to review just how we got here and why it is. Founded in California in 1977, Apple transitioned into a public company at $22.50. Today the split-adjusted price is just $2.75. Interestingly, it has no preferred stock outstanding. Those initial investors, if they’ve held it this long have been on quite a trip but would be up a mere 24,000% or so, depending on the time of the day.

From their resurrection beginning with the return of Steve Jobs to his post as CEO to today, Apple’s rise to the top of the heap has been the only source of return for investors.  The company, instead, has focused on growth and more growth, having rewarded investors with more than a 100% return in the past 12 months.  Apple has resisted paying a dividend as a result, but they’ve been so successful that they are sitting on $117 billion in cash, more than enough to fuel growth and reward investors even more handsomely with a small return, ~1.6%.  They’ll be paying out nearly 27% of EPS.  

 When compared to companies like Hewlett-Packard (NYSE: HPQ) and Dell Computer (NASDAQ: DELL) Apple is entering the income stock world at a very generous level.  Google (NASDAQ: GOOG) has yet to declare a dividend for similar reasons to Apple, they are still using their cash to build out the long-term plans. 

H-P and Dell are in the middle of difficult transitions to new corporate identities.  H-P has not quite figured out yet what they will become, it is too early to tell, while Dell is in the middle of transitioning to a small enterprise solutions provider, rather than a box builder.  Given H-P’s cash position their dividend is at serious risk while Dell’s dividend is a bit safer.

Cisco Systems (NASDAQ: CSCO) is paying out an enormous amount relatively speaking but their turnaround is closer to completion with revenues, margins and earnings growing slowly.  It highlights a trap for U.S. companies, as does H-P’s predicament.  U.S. investors hate having their dividends cut, and companies are trapped between the threat of massive liquidation of their stock by institutions and redeploying cash to improve the company’s business prospects.  Now that Cisco has a dividend it will be a non-negotiable line item for the near future. 

This is the trap that Apple and Google have avoided to this point. 

Apple will start paying shareholders a $9.9 billion annual dividend.  That dividend plus stock repurchases, to support the price, are a signal that their medium term revenue prospects, even if they lose their innovative edge, are strong enough for them to still deploy massive capital to protect their current business.  However, as an income stock Apple is too expensive compared to Cisco, trading at a lower multiple paying a higher yield and whose gross and net margins are expanding, not being shaved like Apple’s are.

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