Apple

23rd March 2012

It's gone from strength to strength, selling 3m of its latest iPads since the model was launched last week. A quarterly dividend of $2.65 will begin in July, marking Apple's first such payout since 1995, says Reuters.

However, Apple is one of many companies that are now a source of dividend payouts, which are becoming a hot target for investors battling economic gloom. They not only provide income but boost stock growth potential.

With nearly $100 billion in cash on its balance sheet, Apple will initiate a dividend and share buyback that will total $45 billion over three years.

However, this move has been expected Apple increased its earnings per share by 83% in 2011, but its shares traded at price-to-earnings multiples in line with smaller businesses rather than leading technology businesses.

Will other technology companies follow suit?

Apple's peers are expected to follow and boost their dividend payouts.

With chunky cash levels on their balance sheets, many tech stocks are set to become ‘classic companies' rather than the boom ones with strong growth prospects a few decades ago.

Microsoft (MSFT) pays a dividend with a yield of 2.4%, for example, while Cisco Systems (CSCO) pays a dividend yield of 1.6 %. Higher dividends would make these large-cap technology companies even more attractive to fund managers and other investors.

Following the news from Apple, Google has becomes one of the largest tech companies that does not offer a dividend payout. The is despite the company holding around $45 billion in cash and trading at a price-to-book value of 3.5, well below Apple's 7.1 price-to-book value. Is the pressure on? After all, it's amazing how long Apple got away without paying a dividend with the cash pile on its books.

However, US companies are different. Rainy-day cash hoards are tolerated because companies have the freedom to invest in research regardless of the ups and downs of the product cycle, and the firepower to pursue big acquisitions.

The popularity of dividends

The volatility in the stock market last year made dividend strategies increasingly popular.

Investors who focus on dividends have an array of stocks to pick from, such as dividend payers like Johnson & Johnson that tend to hold their value during volatile markets because of the payouts.

In the year following the initiation of a regular dividend, tech stocks rise an average of 11% and are positive 64% of the time. However, these names only outperform the overall tech index 51% of the time, points out Financial Post.

How will Apple perform as a dividend-paying stock?

The Guardian says that you still wouldn't buy Apple shares for income. The $10bn that the world's biggest company intends to distribute every year sounds impressive but, at the current share price of about $600, the implied dividend yield is just 1.77%.

For some, Microsoft offers an example road map. Back in January 2003, Microsoft initiated a modest payout in a concession to investors who for years had pressured it to unload its huge cash stash, reports the Wall Street Journal.

Like Apple, Microsoft began with a token amount, paying eight cents a share that year, for an annual yield of 0.3%. The initial dividend saw the company return $32 billion in a 2004 special dividend and ratchet up annual dividends over the next nine years.

But Microsoft's dividend announcement preceded relatively lacklustre share performance. The stock dropped 13% in the three months after the first dividend was announced in January 2003, compared with a 3.7% drop in the Dow Jones Industrial Average.

So when a company has that much excess cash and doesn't really know what to do with it other than return it to shareholders, does it raise a red flag for investors to be wary of?

However, Apple has a lower valuation than Microsoft, and the company is happy to embrace a dividend instead of a string of acquisitions. It also doesn't have to contend with the lafter effects of the tech bubble, as Microsoft did in 2003 .  

Apple's mix of dividend income and growth is a combination likely to attract a wider swathe of investors – watch this space.

 

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