NEW YORK (TheStreet) -- The more money Apple (AAPL) makes, the more of it investors want, but understanding how the iPhone maker can distribute its cash is important in setting realistic expectations.
The Cupertino, Calif.-based technology giant wants to be more shareholder friendly, but with the company due to release its highly publicized Apple Watch and rumors circulating about an electric car to compete with Tesla (TSLA) , Apple still has a business to run. And being too generous too soon doesn't serve the interests of the company or investors.
Apple will update shareholders in April on its capital allocation plan.
Chief Executive Tim Cook is on record as saying that he doesn't want the company to be "cash hoarders," implying that Apple, which pocketed $18 billion in profits in the January quarter, plans to distribute some of its wealth to shareholders.
Here is how Apple can do it. Take a look at the chart.
Although Apple is the most valuable company in the world, with a
of about $750 billion, the company would have had one of the lowest dividend payout ratios had it been a member of the
Dow Jones Industrial Average.
Apple's payout ratio of 25.1% is one-sixth of
payout ratio of 153.5%, the highest among the Dow 30 stocks.
In this case, AT&T, with its payout ratio of more than 100%, is one of the most generous companies, with Coca-Cola (KO) at 75.37% not far behind. And considering that 2.5% has been the average yield of the Dow 30-paying stocks in the past five years, this would be a suitable benchmark to which Apple could aspire.
Apple pays out $1.88 annually to investors. And with fiscal 2016 earnings estimates of $9.16, this would drop Apple's payout ratio by 5 percentage points to about 20.5%.
Apple can conceivably aspire to a payout ratio of 50%, putting it at middle of the Dow 30. This would require a $4.50 annual payout, or $1.12 each quarter.
But a 140% dividend jump in one year won't happen.
Apple could possibly raise its dividend by 6%, bringing its annual payout to an even $2 a share. This, based on its 2016 earnings estimates of $9.16 a share, yields a payout ratio of just 22%, and investors wouldn't be impressed.
A more likely and aggressive boost would be 15%, which would put the annual payout at about $2.17.
Although that only hikes its payout ratio to 24%, it also sets up another 15% dividend hike next year, putting Apple's annual payout at an even $2.50, bringing its payout ratio closer to 30%. And while that still may not impress the market, given Apple's cash of more than $170 billion, combined with an addition $70 billion buyback, which is do-able, Apple would have been generous enough.
TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate APPLE INC (AAPL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and notable return on equity. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
You can view the full analysis from the report here: AAPL Ratings Report
This article is commentary by an independent contributor. At the time of publication, the author held shares of Apple.