Dividend Hikes, M&A Is Apple’s New Capital Allocation Strategy

Apple (NASDAQ:AAPL) CEO Tim Cook recently made some key announcements during the company’s annual meeting, most notable being that the company remains committed to raising its quarterly dividends and that it aspires to acquire more companies on the cheap. Apple has been announcing its dividend hikes during its FQ2 (calendar Q1) reports, note Apple follows an October to September Financial accounting year. Apple CFO Luca Maestri has promised to continue with this tradition during the current quarter by announcing the company’s new capital returns strategy.

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Since launching its dividend program in 2012 at $1.51, Apple has been pretty consistent with its dividend hikes, raising it by 15.1% in 2013 to $1.74; 7.9% in 2014 to $1.88 and 10.6% in 2015 to the current reading of $2.08, good for 2.2% yield. Most of Apple’s excess cash in the U.S. (the company can only use U.S. cash to returns capital to shareholders) has been going into dividend payments with the rest mainly going into share buybacks. In 2015, Apple spent $11.6B in dividend payouts and another $6.5B for share buybacks.

Apple’s payout ratio (expressed as a % of earnings) currently stands at 22%. That’s a pretty low payout ratio considering that Apple has consistently been growing earnings in double-digits. Many tech companies with contracting earnings including Microsoft (NASDAQ:MSFT) and HP INC (NYSE:HPQ) sport considerably higher payout ratios of 53% and 44%, respectively. So there is still plenty of room for improvement here.

Apple stock is now trading near 52-week lows. The company could, therefore, add considerable shareholder value by buying its own stock at these levels. But judging from Cook’s other comments Apple has another trick up its sleeve.

Apple To Focus More On Mergers and Acquisitions

Apple has never been known to be an acquisitive company; at least not in the same league as a company like Oracle (NYSE:ORCL). Although Apple has bought 19 companies over the past 15 months (some are well known while other acquisitions have slipped under the radar), many are small ticket acquisitions that have hardly caused a dent on the company’s cash pile.