Apple’s Future Growth and Dividend Yield

Investors have been suggesting that Apple (AAPL) do something like pay a special dividend with the $98 billion in cash sitting on the balance sheet.  Apple finally moved into action on this topic.  AAPL will pay a dividend of $2.65 per share quarterly, first payable on July 1, for a yield of around 1.8% at current pricing.  Apple also will repurchase up to $10 billion in stock.

We think these actions make sense, given AAPL’s considerable balance of cash and investments of $98 billion as of December 2011.  We note that AAPL plans to use only U.S. cash and investments for these actions, given the adverse tax implications of repatriating foreign earnings.  We think the dividend could attract new investors and investment to AAPL.  AAPL is very close to hitting $600 following the announcement.  While many shareholders agree with this move, some are being alarmist about the maturity of Apple as a stock.  I do not agree with this alarmist theory.

First, Apple has plenty of growth ahead.  It just released the new iPad with recent enhancements and new features.  It has Apple TV in the works for a new platform growth.  Then, you still have the iPod and iTunes that will continue to evolve over time to require upgrades and new service arrangements leading to updated products.  The iPad and iPod will evolve over time like Microsoft Windows did throughout the past two decades with new releases as the software matured.  Apple has a projected EPS growth of 19.5% over the next 3-5 years compared to 7.96% for Microsoft.  AAPL is still a growth stock for the next few

Back in 2005, Microsoft was paying a quarterly dividend of $0.08 for an annual dividend yield just above 1.0%.  Today, MSFT pays an annual dividend of $0.80 with a 2.5% dividend yield.  Over the past 5 years, MSFT has an annual dividend growth rate of 15%.  Apple’s new dividend is starting at 1.8% but I
see it growing over the years similar to MSFT.

Using my stock valuation and dividend model (see chart below), AAPL is projected to be a great long-term dividend stock.  It is projecting that Apple is trading at a 5% discount to a fair value of $630.  The model is projecting that Apple will grow dividends 15% during the next 10 years.  This dividend growth rate is comparable to Microsoft over the past five years.  Using the dividend growth rate, Apple will have a yield on cost of 7.1% in 10 years with a 39% payout ratio.

Click to enlarge