2 Big Dividend Hikes

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

There's nothing better than a company boosting its dividend. In The Ultimate Dividend Growth Portfolio I added both Apple (NASDAQ: AAPL) and Corning (NYSE: GLW) even though the dividends for both companies were fairly new and the yields at the time of purchase were below what I typically like to see. I added them because I thought that there was a very good chance that we'd see substantial dividend growth from both companies, as both dividends were well supported by the respective cash flows. Well, I didn't have to wait long.

Big move by Apple

When Apple announced its quarterly earnings recently there was an expectation that the company would do something with its enormous pile of cash. With $145 billion in cash the company announced a $100 billion plan, including dividends and buybacks, set to play out through the end of 2015. The quarterly dividend was increased by 15%, bringing the yield up to about 3%. This dividend will account for $11.5 billion per year in total, leaving the rest for the largest share buyback program in history.

Although net income fell 17.8% from the same quarter a year ago free cash flow increased a bit in the six-month period ending in March. Margins declined, with the gross margin percentage falling to 37.5% from 47.4% a year ago as revenue grew by about 11%. The new dividend can almost be covered by a single quarter's profits, so while predicting the full year numbers is difficult the payout ratio would still only be 33% if profits fall 17.8% for the year.

The dividend still has ample room to grow even as Apple is spending far more on share buybacks. With a 3% yield I would like to see dividend growth of at least 9% annually, and given the payout ratio this shouldn't be too much to ask. The massive buyback program will reduce the share count substantially, pushing the payout ratio down.

This dividend hike brings Apple's dividend in line with other large tech companies like Cisco and Microsoft, both of which are also part of The Ultimate Dividend Growth Portfolio. The dividend hike and buybacks should create a floor on the stock price, which has been in free fall since last year. The higher yield should also garner the interest of dividend investors who only buy stocks yielding above 3%, of which there are many.

Another dividend hike for Corning

Corning raised its dividend by 20% less than a year ago and has now raised it again, this time by 11%, to $0.10 quarterly. This puts the new dividend yield at around 2.9%. At the same time the company announced a new $2 billion share repurchase plan. With a market cap around $20 billion this plan could potentially buy back about 10% of the company.

In the first quarter GAAP sales were down 6% but EPS was up 6%. On a non-GAAP basis, which excludes the impact of the yen-to-US-dollar exchange rate and other special items, EPS actually rose by 15% on flat sales. Free cash flow was a strong $429 million, up from the same period last year due to lower capital expenditures. The total annual dividend payment will be around $600 million, neglecting the effect of further buybacks, and based on last year's numbers this is about 35% of the net income.

Corning has about $5.7 billion in cash on the books along with $2.9 billion in debt, so the balance sheet can easily support the buyback program. The LCD glass business appears to be stabilizing, so the years of EPS declines for Corning are hopefully over. The company has been working to diversify its revenue stream, but much of the company's profits still come from its LCD glass business.

I expect that the dividend will grow quickly from here, and with two dividend increases less than a year apart the company seems committed to returning profits to shareholders. Before the stock price rose on earnings the dividend yield would have been above 3%, but the rising stock price pushed the yield back down. The yield-on-cost for the Corning position in The Ultimate Dividend Growth Portfolio is now about 3.09%.

How this changes things

These two dividend increases have increased the projected annual dividend income for The Ultimate Dividend Growth Portfolio by about 1%. This may not seem like much but all of these small changes will add up over time. You can track the current state of portfolio by going here. And here's a graphic showing what the portfolio looks like today.


Timothy Green owns shares of Corning. The Motley Fool recommends Apple and Corning. The Motley Fool owns shares of Apple and Corning. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure