The Next Dividend Powerhouse?
I've found the next dividend powerhouse. This company has 20% of its market cap in cash, trades at a low P/E of 13.8 (10.6 when adjusted for cash), and has a new CEO who is open to returning cash to shareholders. Read along and I'll reveal the company and 11 more dividend powerhouses you can buy now.
The next dividend powerhouse
If you haven't guessed already, the company is Apple (NAS: AAPL) . The company has a cash hoard of $81.4 billion collecting dust in its treasury. It added $8 billion last quarter to that hoard, with no signs of that cash flow stopping. New CEO Tim Cook is open to returning cash. He would have three options:
First up, acquisitions. Large acquisitions have a horrendous record and would be counter to Apple's strategy of small acquisitions. As Motley Fool technology editor Eric Bleeker has said, "the idea of a company with such a unique vision and relentless pursuit of quality swallowing up and integrating another company doesn't make a lot of sense." With that out, we move on to option two.
Next up, buybacks. While some academics would tell you that buybacks are the best way to return cash to shareholders, Steve Jobs was opposed to buybacks. He was right. For one, they reward shareholders who are leaving, rather than those who are sticking with you. Second, companies have a horrendous track record of buying back shares at inflated prices. A recent study from McKinsey found that S&P 500 companies tend to buy back more shares when their share prices are high and stop purchasing when their share prices are low. The study goes on to say that "from 2006 to 2010, share repurchases came at the expense of long-term loyal shareholders by delivering lower returns than they might otherwise have received."
There is a better way. The study "compared the actual repurchases of S&P 500 companies from 2004 to 2010 with a modeled strategy of buying the same dollar amount of shares each quarter, much as an investor might regularly purchase shares as part of an income-averaging approach." The result? The median return of actual buybacks underperformed the strategy of regular payments by 4.5%. Overall, only 23% of companies' buyback programs beat the returns from a regular payment.
Apple would greatly benefit shareholders with a regular dividend. Apple generates more than enough cash to pay a hefty one. A $10 billion annual dividend would give the stock a yield of 2.8%, about on par with dividend champion Microsoft (NAS: MSFT) and more than double fellow cash hoarder Cisco's (NAS: CSCO) 1.3% dividend.
Some would argue that paying a dividend means the company is admitting it doesn't have strong growth opportunities. News flash: An $80 billion cash pile says the same thing. Research also surprisingly shows that on average, higher dividends actually tend to come with higher earnings growth. A study by Rob Arnott and Cliff Asness divided stocks into deciles and found that the highest-yielding decile had the highest earnings growth over the next 10 years. Some believe this happens because a dividend policy encourages companies to focus on profitability and avoid the waste that naturally occurs in a large company. Jobs tried to institutionalize a culture of innovation and focus before he gave up the reins of the company. A dividend policy could add to that institutional focus.
The powerhouse power-boost
A $10 billion annual dividend could easily be funded by cash flow from operations and not reduce Apple's current cash hoard. One thing to note about the cash is that $54.3 billion of the $81.4 billion is held by foreign subsidiaries and as such is subject to a repatriation tax if brought back to the U.S. Many large U.S. companies have this problem, including Pfizer (NAS: PFE) , Eli Lilly (NYS: LLY) , and others in the biotech sector, as well as tech stalwarts Intel (NAS: INTC) and Oracle (NAS: ORCL) . However, a repatriation tax holiday is being discussed in Congress, which could lead to a huge one-time special dividend, a veritable power-boost to this powerhouse stock.
Foolish bottom line
Apple has the opportunity to become a dividend powerhouse. If you are looking for some current dividend powerhouses, check out our brand-new free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." It features a diversified list of 11 powerhouse dividend stocks. Just click here for your free copy.
At the time this article was published Fool contributorDan Dzombakowns shares of Eli Lilly and Cisco Systems, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Intel, Apple, Cisco Systems, Microsoft, and Oracle. The Fool owns shares of and has bought calls on Intel. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Apple, Cisco Systems, Microsoft, Intel, and Pfizer.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft, a bull call spread position in Apple, and a bull call spread position in Intel.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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