December 2, 2015

Apple (AAPL) delivered another impressive quarterly earnings report for Q3 that surpassed analyst expectations, with year-over-year profits up 31 percent and earnings per share of $1.96, up 38 percent, on revenue of $51.5 billion. Apple’s guidance for Q1 2016 revenue of $75.5-$77.5 billion surpassed analysts’ expectations, as well. It was by all accounts a very strong quarter, and encouraging for long-term Apple investors.

But for some poring over Apple’s financials, lingering questions still remain about Apple’s prodigious cash pile of more than $205 billion and its ramifications for shareowners. As Robin Wigglesworth, U.S. Markets Editor for the Financial Times, tweeted after Apple’s earnings announcement, “If Apple was an asset manager it [would] be bigger than Loomis Sayles, Babson, Janus, Bridgewater, TCW, Putnam, Henderson, Standish etc…..” For investors betting on a company that delivers stylish electronic devices with sleek operating systems, it was a potentially alarming insight.

As with most companies, Apple invests its “cash” in a variety of “cash equivalent” fixed income products, including Treasuries and other short-duration assets considered safe and liquid. But as Vipal Monga of the Wall Street Journal reported in September (“The New Bond Market: Big Buyers of Corporate Debt Are Other Corporations”), Apple now has more than $99 billion of corporate bonds in its portfolio, representing almost half of the cash on its balance sheet, which are considerably more risky. With that scale, Apple now manages more fixed income assets than Jeffrey Gundlach’s Doubleline Capital Management, which reported $76 billion of assets under management as of June 30. In fact, just the most recently quarterly increase in Apple’s cash position, $3 billion, is more than double the total assets managed by Bill Gross in his Janus unconstrained bond fund.

Which raises the question: Are Apple investors really seeking exposure to a massive fixed income mutual fund? Or would they be better served if Apple returned more cash to them?

Apple already pays a substantial dividend, which at $11.6 billion annually puts them in a virtual tie with ExxonMobil for the world’s largest dividend-payer. Many investors forget that Apple first initiated a quarterly dividend of $0.06 per share in 1987, which grew to $0.12 per share in 1991 and remained at that level until it was discontinued in 1995. With some pressure from activists, Apple reinstated its dividend program in 2012, starting at $2.5 billion per quarter. However, their dividend has grown just $500 million annually in each of the past two years, failing to keep pace with earnings and cash flow growth.

Despite the outright size of Apple’s dividend, they are stingy relative to their peers. The company’s current payout ratio is only 27%, compared to an average payout ratio of 64% for the next five largest dividend-paying companies by market capitalization, which include Microsoft (63%), ExxonMobil (73%), Wells Fargo (36%), Johnson & Johnson (63%), and GE (82%). At that rate, Apple could easily double its current dividend to $23.2 billion in aggregate ($4.16/share/year) and still maintain a significant cash balance and ample cash flow to fund its growth. The impact of such a move would be profound, increasing the total S&P 500 dividend by approximately $5/share, or 11.5%.

While Apple could readily cover an increased dividend through its prodigious cash balance and free cash flow, it also has another alternative source of funds to put cash into its shareowners’ pockets via dividends. The company continues to spend a significant portion of its available cash on share buybacks, totaling nearly $100 billion over the past three years and $34 billion in fiscal 2015 along. While such a buyback program flatters per-share earnings numbers and supports the company’s share price, a dividend program would return cash directly to shareowners, and enable them to purchase more shares if they chose.

Reality Shares analyst Kian Salehizadeh assessed Apple’s dividend potential. You can read the complete article on TheStreet.com.

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