Apple (AAPL) stock went ex-dividend today, and as puny as the payout might be on AAPL stock, the real cash is being returned to shareholders through its stock buyback program.
There are a couple reasons to favor repurchases over dividends. For one thing, unlike buybacks, dividends get taxed twice. AAPL pays tax at corporate level, and then investors get taxed on their dividends.
True, the Apple dividend looks like a joke. The yield on AAPL stock is 1.74% — far below the technology sector average of 4.3%, according to Dividend.com.
That makes the payout ratio less than 22%, even though AAPL has more than $200 billion in cash and cash equivalents alone on its books.
It’s not that AAPL is being especially cheap. The problem is that about $181 billion of that hoard is held overseas. Were AAPL to repatriate it, the cash would be subject to U.S. corporate taxes. With a headline corporate tax rate of 35%, the bill can really add up.
True, AAPL can — and does — borrow money against that cash to pay dividends and fund stock buybacks, so why can’t it do more? Because it is buying back epic amounts of AAPL stock.
Indeed, Apple dished out $3 billion for dividend payments in the most recent quarter, but $17 billion on AAPL stock buybacks.
AAPL Shareholders Can Expect Even More Cash
Apple has also been regularly raising the limits of its capital return program. After years of climbing steadily, Apple is authorized to spend $60 billion on dividends and $140 billion on share repurchases by 2017. Just the promise of such returns helps support a higher price for AAPL stock.
Importantly, Apple can make those payments without loading up its balance sheet.
Sure, AAPL issued more than $29 billion in debt last year, but it also generated free cash flow of $50 billion. With total debt payments of just $514 million last year, Apple’s balance sheet is pretty much pristine.
That said, perhaps AAPL should raise its dividend, if only for the optics. Activist investors couldn’t use the slim yield as a knock against the board of directors.
It would also make shares more attractive to dividend investors.
Either way, don’t let the dividend fool you. Yeah, the company with a market cap of $675 billion paid investors only 52 cents for every share they hold, but the total capital plan is mighty indeed.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
