One of the reasons for the latest round of enthusiasm for Apple Inc. comes not from the lineups for the new iPad but from Monday’s announcement that it will pay a quarterly dividend. Starting this summer, Apple will pay out $2.65 (U.S.) a share per quarter, giving the shares a yield of about 1.8 per cent right now.
According to Bloomberg News, this is the largest-ever dividend initiation for a company in the S&P 500. That’s an impressive start – and with Apple expected to churn out $150-billion in free cash flow over the next three years, investors are no doubt under the belief that the quarterly payout is going to rise in the years ahead.
But what’s interesting is that some analysts believe the move to start paying a dividend will bring a side benefit: It will raise demand for the stock, since dividend-focused investors, mutual funds and exchange-traded funds will now put Apple on their radar screens.
I’m thinking out loud here, but is that really an important issue? Apple has already jumped to the top of the corporate ranks in terms of its market capitalization, its share price has risen 550 per cent over the past five years and it is now the most talked-about company in the world. It is hardly being ignored.
Perhaps more importantly, I’m not sure how a bigger base of investors necessarily translates into a stronger share price. If so, then any company added to a high-profile index like the Dow Jones industrial average or the S&P 500 should see fantastic gains as index funds are forced to load up. But, clearly, this isn’t always the case.
Cisco Systems Inc. was added to the Dow Jones industrial average in January, 2008: Since then, it has risen all of 1.6 per cent, vastly underperforming the 50 per cent gain in the S&P 500 over the same period. And of course, Bank of America Corp. has slumped 77 per cent since it was added to the Dow in February, 2008.
Broader investment base or not, it seems that there were other more important factors at work on both of these examples, such as valuations, the economy and the competitiveness of their respective sectors. It makes me wonder if Apple is any different, and whether investors should focus less on the company’s new dividend policy and more on other aspects of its business – whether that’s how insanely great the new iPad is or how competitors are nipping at its heels with cheaper products.Report Typo/Error