I have recently made an argument that Apple could reasonably double its dividend payments, if it wanted to do so, without jeopardizing its financial position. The main reason for the move would be the following:
Now, I look at the reasons why Apple might not want to do so, in true devil’s advocate style. Check out each argument below.
The case against higher dividends
- Once the cat is out of the bag, there is no going back inside. Dividend investors expect payments to be consistent and, ideally, to grow over time. Meanwhile, Apple is still exposed to the ebbs and flows of the tech device space, and it is not immune from a deterioration in business fundamentals. Should the cash flow spigot lose its force, Apple might lose financial flexibility in the face of its increased dividend commitment to shareholders.
- Apple may not have access to all its cash on hand in order to finance the additional dividend payments. For example, some of it is currently held overseas and may be subject to taxation if repatriated. Therefore, the company might need to issue even more debt to meet its dividend goals.
- Credit rating agencies may not appreciate a more aggressive cash distribution policy, especially during a recession. While Apple currently sits on a large pile of cash, its debt obligations are also large: nearly $113 billion between commercial papers and loans. Should the company’s debt be downgraded or subject to negative bias, interest on future debt issuance could rise. At this point, higher interest expenses could eat into Apple’s earnings.
- There may be a negative psychological impact to raising dividends. It could signal Apple’s lack of confidence in growth, since the company can always choose instead to allocate dividend cash towards capital projects or M&A.
Check out these articles next:
(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)