Though Apple Inc. (Nasdaq: AAPL) is certainly not nearly as ancient as the namesake fruit in that Garden of Eden scandal, there’s a story behind its corporate success that’s as old as capitalism itself: Some titans of commerce just don’t want to share the wealth.
Such was the case with the late Steve Jobs, who for all his genius as the man behind the iPhone, iTunes and the iPod, was regarded by many shareholders as iScrooge. The reason: He famously hated and refused to award dividends, even when the company he co-founded soared into stratospheric wealth in triple-digit billions.
Then again, Jobs had his reasons to hold fast in the early days of his return to Apple following a lengthy ouster, experts say.
“The long stretch during which Apple paid no dividend probably reflected Jobs’ searing experience rescuing the company from near death,” says Barry Randall, chief investment officer at Crabtree Asset Management and manager of the Crabtree technology portfolio for Interactive Brokers Asset Management.
Randall says Apple “was so starved for cash in 1997, Jobs struck a deal with Apple’s archenemy Microsoft Corp. ( MSFT), in which the latter invested $150 million in Apple in exchange for preferred stock. Paying that out as dividends would have been unthinkable.”
Once Apple was out of the weeds for good, current CEO Tim Cook ushered it into the dividend era on March 19, 2012 — the first time the company had awarded such a payout since 1995. And it was definitely, positively about time, as Apple today is on the verge of becoming the first $1 trillion company in history. (Its market cap sits at $889 billion.) Apple also boasts an enormous cash reserve worth of roughly $257 billion: a third-plus higher than total market cap of the Coca-Cola Co. ( KO).
“What Steve Jobs did with beautiful design work Tim Cook is doing with free cash flow,” says Ryan Krueger of Krueger & Catalano Capital Partners in Houston. Funds got unlocked for two reasons; “First, Jobs did not want other app makers available on Apple and did not want to pay dividends to shareholders. Changing course on each make Apple one of the ultimate free cash flow machines internally and into the mailboxes of its shareholders.”
As for continued sharing of the wealth, you might think the computer megalith is on the fast track to becoming one of those ” dividends kings” — that is, a company that raises its dividend year after year without interruption. Then at some future point it could join the likes of Dover Corp. ( DOV) and Johnson & Johnson ( JNJ), both riding winning streaks of more 50 years.
Granted, six years does not a half-century make. That noted, “Apple has increased its dividend amount every year,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.
Johnson points out that since 2013, Apple’s payout ratio — the dividends per share divided by earnings per share — “has consistently represented approximately 25 percent of earnings. Apple’s current yearly dividend is $2.52, representing a dividend yield of 1.43 percent, compared to the average dividend yield on the S&P 500 of 1.82 percent. While Apple pays a dividend, it wouldn’t be classified as a classic dividend stock by investors.”
“I doubt that Apple would become a dividend king or have a yield over 4 percent — ever,” says Scott Freeze, chief investment officer of Sabretooth Financial in the Philadelphia area. “They need to grow and that will not happen through paying more to shareholders as a dividend. It will only happen through product innovation, and research and development spending that will boost sales and market share.”
As far as that goes, Apple may be beyond the crossroads at this point. Say what you like about Jobs as a dividend miser: The man was a rock star of innovation. And not much of that has happened since he passed in 2011, unless you count the utterly underwhelming Watch and iPhone X — the latter with an inelegant, steer horn-shaped bezel that arguably would’ve sent Jobs into one of his legendary rages for the ages.
“Apple still thinks it needs to spend money on new products and acquisitions,” says Peter Cohan, lecturer of strategy at Babson College in Wellesley, Massachusetts. “But its relatively slow rate of revenue growth — 7.9 percent on average over the last five years — suggests that those investments are not paying off. Steve Jobs would be turning over in his grave lamenting all of Apple’s lost opportunities to diversify its revenues from its heavy dependence on an 11-year old product.”
Meanwhile, Apple’s most recent quarterly dividend was 63 cents per share.
“Apple appears committed to increasing quarterly dividends by roughly 10 percent a year,” says Anne Drougas, chair of the accounting, finance and entrepreneurship department at Dominican University’s Brennan School of Business in suburban Chicago. “However, whether it will become a reliable source of strong dividends is still in question.” Part of the reason: “In 2016, Apple’s iPhone sales declined for the first time.”
As for what to expect in the years to come, think of it as Apple’s ripening, a Golden Delicious period — with the ever-so-slight chance of rot.
“Investors should expect the dividend to slowly increase over time, reflecting Apple’s maturation into a slower-growing but more highly profitable company,” Randall says. “A higher percentage of Apple’s revenue will come from recurring services such as iTunes, giving Apple’s management more confidence in raising the dividend and increasing the yield.”
Apple remains dependent — for now — on popular products like the iPhone, Randall adds.
“Popularity is fleeting,” he says, “and Apple’s dividend could be, too.”
Lou Carlozo, managing editor for the Bank Administration Institute, is a U.S. News & World Report investment contributor who has covered a wide range of topics ranging from analysis of quarterly reports for Apple (APPL), Netflix (NFLX) and Tesla Motors (TSLA) to baffling nature of Wall Street jargon. An award-winning journalist, he served as an editor, syndicated weekly columnist and writing coach at the Chicago Tribune, where he worked for 16 years. He was also managing editor for Aol’s personal finance team, a full-time contributor to Reuters Money and a weekly columnist for Money Under 30. His recent piece on Laughter and Sales was selected as one of the 10 Best Blogs of the Decade by Ambition.com. The author of a journalism textbook and an accomplished music producer/studio musician, he resides in Chicago with his wife and two children, just a long fly ball from Wrigley Field.