Apple Inc. has been one of the greatest growth stories of the past 50 years. Since the introduction of the iPod music player in October of 2001, Apple has roared back from the brink of oblivion to become the world’s largest public company with a total stock market value of $550 billion.
Investors have been richly compensated for their devotion, as the company’s stock has gained an eye-popping 5,700 percent over the past decade. However, this startling success has presented the company with a dilemma that all pure growth firms eventually confront: When to start paying dividends.
For Apple, the answer is now. Beginning July 1, the firm will distribute a quarterly dividend of $2.65 per share, or about $10 billion per year. That translates into a 1.8 percent yield based on today’s stock price. Furthermore, the company announced plans to buy back up to $10 billion worth of stock over the next three years in an additional measure to shovel cash out to shareholders.
Of course, Apple’s
dilemma is born of a most enviable circumstance: It has amassed too much dough. The fortuitous confluence of high margins and red-hot demand has larded Apple’s coffers with $98 billion in cold hard cash. To put that figure in perspective, it exceeds the market value of 473 of the 500 companies in the S&P index. That cash ultimately belongs to shareholders, who have been clamoring to get their hands on some of it.
Now they will.
Corporations need capital to finance growth. The first place to turn for expansion capital is the pot of profits generated in prior years that have been held over as retained earnings, rather than having been paid out to shareholders as dividends.
As long as investors believe that the cash will nourish more growth, they are content to let it ride. If not, they will begin to bang the drum for the company to distribute some of those profits. In the case of Apple, the stash had ballooned beyond any reasonable level needed for capital investment, leading shareholders to demand a payout.
The transition to dividend-payer marks a rite of passage for high-flying growth companies. Many of the staples of equity income portfolios today were once no-dividend, hard-charging pure growth plays. Microsoft began paying dividends in 2003 for much the same reason as Apple — the accumulation of a cash hoard that grew beyond the company’s legitimate needs for investment in future growth.
Microsoft sports a 2.5 percent dividend yield. Intel Corp., another former growth star, now yields in excess of 3 percent.
This point matters to investors because payment of dividends combined with systematic increases in the payout rate have accounted for well over half of historical equity returns. It’s nice to enjoy a big price jump once in a while, but serious money is made over time through dividend expansion and reinvestment.
Now you can add one more contender for consideration in your dividend growth portfolio. There must be an app for that.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at firstname.lastname@example.org.