Apple Could Benefit From a New Dividend and Buyback Increase

Apple’s stellar earnings for the first quarter, released on Jan. 27, will likely lead to a higher dividend per share declaration after March. This could also help push up AAPL stock even further. This is because the stock’s dividend yield goes up from the higher prospective dividend.

So far this year, AAPL stock is still below where it ended last year. On Dec. 31, it closed 2021 at $177.57, but as of Feb. 25, AAPL stock hit $164.85. This means it is still down 7.16% year-to-date (YTD).

But that is after it hit a trough price of $159.22 on Jan. 27, right before earnings came out. Since then, the stock has been consistently moving higher. This is because investors realize the company’s strong earnings are likely to continue through the coming year.

Where Things Stand At Apple Inc.

For example, Apple delivered an 11% year-over-year (YOY) gain in revenue for the first quarter. This included $71.6 billion in iPhone sales, which exceeded analysts’ expectations of just $67 billion in revenue.

However, more importantly, Apple posted a huge gain in its quarterly free cash flow (FCF). FCF is the amount of cash flow left over after all spending and expenses that can pay for dividends, dividend increases, and continuing share buybacks.

And that is what Apple has been doing with its huge free cash flow. For example, as seen on page three of the financial statements, Apple generated $44.16 billion in FCF for the quarter. It used that FCF to pay for $3.73 billion in dividend payments as well as $20.49 billion in share repurchases.

This means its total spending on shareholder returns (dividends and buybacks) was just $24.2 billion. That is slightly less than 55% of its total $44.163 billion in FCF. So, clearly, Apple could easily increase its dividend and share buyback activity.

Where This Leaves the Dividend

In the last four quarters, Apple paid out 22 cents each quarter. However, usually after every four quarters, Apple increases its quarterly dividend payment.

Therefore, investors can expect, likely sometime in April, an announcement that the quarterly dividend will rise at least 10%. I estimate Apple will raise it to 24 cents per quarter or so. That will raise it to 96 cents per year.

That will give AAPL stock a dividend yield of 0.58%. That is slightly better than its dividend yield today of 0.5338%. It also means investors get paid a little bit more than before.

However, keep in mind the company spends much more money on its share buybacks than dividends. But it still has much more room to increase its share repurchase activity. That is because the total of its share buybacks and dividends is still almost $20 billion less than the total of its free cash flow.

That can be seen by taking the $44.16 billion in FCF and deducting the $24.2 billion dividends and buyback spend. This leaves $19.963 billion that could still be spent on dividends and buybacks. In other words, Apple has plenty of room to increase its total yield to shareholders.

Where This Leaves Investors in AAPL Stock

In the past year, Apple spent $88.1 billion on share repurchases. This works out to 3.28% of its $2.69 trillion market cap. If you add in the .58% dividend yield, the total yield to shareholders going forward is 3.86%. That is a great return for most shareholders.

This shows the company has plenty of cash flow to provide a good return to shareholders. This can be done both through potential dividend increases and share buybacks.

It looks like the company is likely to soon announce another major buyback program as well. Here is the reason why: Based on page 11 of its 10-Q filing, Apple has now spent almost all of its $315 billion in authorized share repurchases. As of Dec. 25, it had spent $274.5 billion of this total. That leaves just $40.5 billion.

Earlier in the December quarter, the company already spent $20.48 billion in share buybacks. If it spends a similar amount in the quarter ending March 2022, that would leave just $20 billion for the June quarter. Typically, the company will announce a new buyback program before it runs out of authorization.

This announcement will coincide with a new dividend increase. So sometime in the next month or so, expect to see Apple announce a dividend and share buyback increase. That will act as a major catalyst for AAPL stock.

On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.