Apple Inc. (AAPL), Corning Incorporated (GLW) & Two Massive Dividend Hikes

There’s nothing better than a company boosting its dividend. In The Ultimate Dividend Growth Portfolio I added both Apple Inc. (NASDAQ:AAPL) and Corning Incorporated (NYSE:GLW) even though the dividends for both companies were fairly new and the yields at the time of purchase were below what I typically like to see. I added them because I thought that there was a very good chance that we’d see substantial dividend growth from both companies, as both dividends were well supported by the respective cash flows. Well, I didn’t have to wait long.

Big move by Apple

When Apple Inc. (NASDAQ:AAPL) announced its quarterly earnings recently there was an expectation that the company would do something with its enormous pile of cash. With $145 billion in cash the company announced a $100 billion plan, including dividends and buybacks, set to play out through the end of 2015. The quarterly dividend was increased by 15%, bringing the yield up to about 3%. This dividend will account for $11.5 billion per year in total, leaving the rest for the largest share buyback program in history.

Although net income fell 17.8% from the same quarter a year ago free cash flow increased a bit in the six-month period ending in March. Margins declined, with the gross margin percentage falling to 37.5% from 47.4% a year ago as revenue grew by about 11%. The new dividend can almost be covered by a single quarter’s profits, so while predicting the full year numbers is difficult the payout ratio would still only be 33% if profits fall 17.8% for the year.

The dividend still has ample room to grow even as Apple Inc. (NASDAQ:AAPL) is spending far more on share buybacks. With a 3% yield I would like to see dividend growth of at least 9% annually, and given the payout ratio this shouldn’t be too much to ask. The massive buyback program will reduce the share count substantially, pushing the payout ratio down.

This dividend hike brings Apple Inc. (NASDAQ:AAPL)’s dividend in line with other large tech companies like Cisco Systems, Inc. (NASDAQ:CSCO) and Microsoft Corporation (NASDAQ:MSFT), both of which are also part of The Ultimate Dividend Growth Portfolio. The dividend hike and buybacks should create a floor on the stock price, which has been in free fall since last year. The higher yield should also garner the interest of dividend investors who only buy stocks yielding above 3%, of which there are many.