Would Apple (AAPL) Be The Perfect Dividend Stock? 10 Reasons Why It Just Might Be!

By: ispeculatornew
Date posted: 08.05.2011 (5:00 am) | Write a Comment  (2 Comments)

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Forget for a few minutes that Apple does not currently pay out any dividends and that it is hoarding cash like no other company has ever done. At some point, stockholders will succeed in convincing management that some of that money needs to be paid out to investors. Why? Because those cash reserves are already incredibly high and mounting every single day with no end in sight. It’s not as if Apple was declining, had some negative return projects that required massive investments or anything of that type. As Apple currently starts looking for new management in case Steve Jobs is unable to return, the possibility of Apple starting to pay out a dividend has certainly increased in the past few years.

Would Apple Automatically Become A Dividend “Must Have”?

I know, if Apple started paying out dividends, it would be at least 25 years away from becoming a dividend aristocrat, would have no history and would have a difficult time being judged for at least 5 of the 20 things that we look for in dividend stocks. Could it be considered a sustainable dividend stock? That would also be a difficult case to make given how quickly Apple became the tech giant that it is, can we really assume that it will remain so for 20, 30 or even 40 years?

Every Rule Has An Exception

I think that in this case Apple would warrant an exception and could be considered a great dividend portfolio holding. Why? Here are the top 10 reasons why:

1-Bringing In Cash Like No Other Company: How many companies do you own that have this much earning power? Apple could easily live off of just one of its hit products but has several high margin businesses that bring in cash flows every day. That cash could easily start being paid out to shareholders.

2-Residual Income: Apple is able to generate “residual sales” as a very large part of its consumers end up upgrading their products every few years. As Apple is able to release new generations of its products every year, that translates into very solid revenues and earnings that can be counted on. The stability in cash flows that this brings is very valuable for dividend investors.

3-Solid Balance Sheet: I tweeted that Apple had enough cash to buy Goldman Sachs (GS), LinkedIn (LNKD) and Twitter, I think that gives a very good idea of just how much reserves the company has. Even if it started off by paying a few billions in annual dividends, it could keep that payout for decades without even worrying about its debt ratio.

4-High Growth: Because of Apple’s size and its name, many assume that this is a slow growth company. That would be innacurate. The company has been increasing its sales and profits by double digits for several years and does not show any sign of slowing down. Will it remain so for decades? That seems impossible. But even a few more years will make Apple an even greater force. This natural growth would translate into dividend growth as well.

5-Lots of Upside Potential: It’s easy to forget that Apple still has a lot of markets to enter. There are strong rumors that Apple will enter the TV market in the next 2-3 years, it will continue to gain market share in the tablet as well as increase sales of smartphones. Another area of growth is the growing presence of Apple in China where it has several hunded of millions potential consumers.

6-Stable Company: We are often led to believe that without Steve Jobs, Apple would be nowhere. While he has been the force for inspiration and innovation, I think it’s important to also see how well the Apple machine has been working. It delivers hundreds of millions of high quality products, on time and has been able to

7-Limited Competition: A few years ago, developing a tablet device or a smartphone was all about hardware but with the explosion of apps and their increased importance, it seems as though only Android powered devices can truly compete with Apple in most of its markets and while that is solid competition, having only the two of them is a great environment for Apple.

8-Attractive Valuation: As I debated when I last traded on Apple, I find it incredible that the stock remains so cheap. It seems too good to be true and it usually is when everyone agrees which is currently the case (virtually all analysts have a buy or strong buy rating on Apple) but I still believe that it is the case.

9-Lots of momentum: While this is not a deciding factor, the fact that Apple’s stock has been doing so well translates into a very strong trend analysis score which certainly indicates that it is a good time to buy Apple.

10-Low Payout ratio: This might be somewhat speculative but if we expect that Apple would start at a 1% dividend yield or so, that would mean a dividend of $4 per share or so per year. That would translate into a payout ratio well under 20%, an excellent one by any standard.

So I throw the question back to all of you dividend investors: If tomorrow morning Apple announced the initiation of a dividend, would you jump on board?

Disclosure: Long Apple (AAPL)

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  1. Comment by Stephen — August 9, 2011 @ 10:52 am

    It would be great if they start paying dividends.

  2. Comment by Intelligent Speculator — August 10, 2011 @ 3:44 am

    @Stephen – Unlikely for sure but it would be very nice.

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