Why the Apple Dividend Will Go Up at Least 10% Next Month (AAPL)

The Apple dividend is getting a fat raise in April.

In fact, Apple Inc. (Nasdaq: AAPL ) is almost sure to raise its dividend at least 10%.

So let's take this one piece at a time. How can investors be so sure that the AAPL dividend is getting hiked next month?

Certainly, the Cupertino, Calif.-based company's balance sheet can support it. As of January, Apple reported that it had $178 billion in cash and cash equivalents. And while $137 billion of that lies overseas, low interest rates mean Apple can sell bonds to get as much cheap money as it needs.

We also know that Apple has made a large commitment to returning cash to its shareholders. In addition to launching the dividend in 2012, Apple has spent nearly $70 billion on buying back shares of AAPL stock . It has authorized a total of $90 billion for buybacks.

The Apple dividend currently costs the tech giant $11.1 billion annually, although it can afford more. With a payout ratio of just 25%, Apple has the headroom to keep raising its dividend for years.

As for the timing, Apple has raised its dividend in April for the past two years. In fact, Apple has made the announcement on April 23 both years. (In April of 2012, the Apple dividend had not yet started.)

Plus, the dividend announcement coincides with Apple's March quarter earnings release. While unofficial as of now, most earnings calendars are listing April 21, 22, or 23 for AAPL's Q2 earnings release.

We know Apple will again use this event to raise its dividend because, well, it has said so publicly two years running. It even used the same sentence in both press releases: "The Company also plans to increase its dividend on an annual basis."

It doesn't get any clearer than that.

But how do we know the Apple dividend is going up by 10% or more?

These numbers don't lie....

Why the Apple Dividend Will Get a Steep Hike

While Apple could satisfy its promise to raise its dividend with a modest hike of a few pennies, that would be needlessly stingy.

Not only does Apple have the largest market cap of any company at $753 billion, it's nearly twice the size of the next-largest company. (That would be Google Inc. [Nasdaq: GOOGL , GOOG ] at $392 billion.)

In the December quarter Apple made $18 billion in profit, the most by any company in history.

And profits are growing rapidly. From its 2013 fiscal year (which ends Sept. 30) to its 2014 fiscal year, Apple earnings rose 13.55%. Earnings for 2015 are projected to grow by 33%.

Since the Apple dividend is only three years old, we don't have a lot of history to work with. But we know Apple increased its dividend 15% in 2013 (from $0.38 to $0.44) and 8% last year (to $0.47).

The strong earnings growth alone argues for a hefty hike in the Apple dividend. But let's look at some more numbers to zoom in on a more specific prediction.

Finding Clues in AAPL's Numbers

First we have the yield. With the recent rise in the Apple stock price, the yield is down to 1.5%. For most of the nearly three years the Apple dividend has existed, the yield has hovered closer to 2%. When AAPL shares bottomed out in 2013, the yield rose to 3%.

For the yield to get back to 2%, the Apple dividend would have to rise $0.18 a share to $0.65 - a whopping 38% increase. And keep in mind that the AAPL stock price is expected to reach the $150 to $160 range before the end of the year, which will push the yield back down.

Now let's look at the payout ratio, which is the proportion of earnings getting paid out in dividends. Lower payout ratios not only mean the company can better afford what it's paying now, but has the headroom to raise dividends in the future.

Apple's payout ratio is 25% right now, below the S&P 500 average of about 32%. But here's where we find some consistency, and our best clue as to what Apple will do next month.

In its FY2013, Apple's payout ratio was 28.53%, while in FY2014 it was 28.22%. For the payout ratio to get back to 28%, based on the trailing 12-month earnings of $7.39, the Apple dividend must rise $0.05 to $0.52 - a 10.64% increase.

That sounds like a number we're most likely to see from a fiscally conservative operation like Apple, even with the place awash in cash.

The Apple dividend could go a little higher. If you drop Apple's projected FY2015 earnings into the mix, $8.59 a share, and keep the payout ratio at a modest 25%, you get a 14.3% increase to $0.54.

It's a good time to be an Apple investor.

The Bottom Line : We know Apple will raise its dividend in April based on past practices and its stated intentions. Given the company's almost surreal ability to generate cash, Apple investors should expect a hike in the Apple dividend of at least 10%.

Apple Stock Targets Too Low: After Apple's amazing December quarter, analysts have scrambled to raise their AAPL stock price targets. And yet most are still not much higher than the current price, and many are actually lower.Here's what these analysts are leaving out of their calculations...

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.