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Stock Analyst Update

Is an Apple Dividend Hike on the Horizon?

We're not anticipating an exponential increase in the narrow-moat firm's dividend or buyback plans, given Apple's historically conservative nature.

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We will maintain our fair value estimate and moat rating for  Apple (AAPL) as the firm disclosed several figures regarding how it contributes to the U.S. economy, the most notable of which is the company's looming $38 billion of tax repatriation payments to be made to the U.S. The payment amount is not overly surprising to us, in light of the firm's $252 billion of overseas cash as of December 2017 and recent U.S. tax law changes that require an immediate 15.5% tax payment due on all overseas cash.

The payment should enable Apple to bring more of its overseas cash back into the U.S., thus making it available for dividends, buybacks and domestic M&A. However, we note that Apple's strategy over the past few years has been to take on debt at especially low interest rates, in order to effectively raise the firm's U.S. cash balance for dividends and buybacks. In turn, the offshore cash effectively acted as collateral for this newfound debt.

We have long anticipated that Apple will raise its dividend and buybacks over time, and new tax laws will enable Apple to do so directly via U.S. cash, rather than indirectly with a mix of debt and offshore earnings. However, we're not anticipating an exponential increase in either type of distribution. Given Apple's historically conservative nature, we suspect that much of this cash will be retained to pay off future obligations and that Apple will refrain from entering into a net debt position.

Apple also intends to spend over $30 billion on capital expenditures in the U.S. over the next five years ($10 billion of which will be spent on data centers) and hopes to create over 20,000 new jobs in the U.S. Apple also hinted at establishing a new corporate campus in a location that has not yet been announced. Finally, the firm increased the size of its Advanced Manufacturing Fund from $1 billion to $5 billion. Corning and Finisar have been notable recipients of investment dollars from the fund thus far.

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.