After its January swoon and miserable earnings report, Apple Inc. (AAPL) stock is now down about 17% in the past year. It’s been hard for shareholders to watch AAPL stock fall while high-growth tech rivals Alphabet Inc (GOOGL, GOOG), Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX) have all logged 35-90% gains during the same stretch.
Apple’s under-performance can be particularly frustrating considering the $200 billion-plus in cash that the company has on its balance sheet.
Outgrowing Growth
One of the downsides to AAPL’s overwhelming success in recent decades is that the company has grown to be the largest public company in the world. Even though the stock is well off its all-time highs, Apple’s market cap is still more than half a trillion dollars. It’s unfair for investors to expect a company that size to compete with the types of growth rates that companies the size of Salesforce.com, Inc. (CRM) ($47 billion market cap) or Netflix ($39 billion market cap) can generate.
Sharing The Wealth
However, when companies can’t rely on huge growth to lure investors, capital return is often the next best thing. In Q4 of 2015 alone, AAPL spent $17 billion on capital return, $14 billion in open market share buybacks and $3 billion in dividend payments. Last quarter, it returned another $9 billion to AAPL stock owners. After first implementing a dividend back in 2012, Apple has aggressively increased its annual dividend each year since and is now paying a 2.1% yield.
For shareholders, the fact that the company is swimming in cash, the stock has under-performed peers and Apple’s dividend yield remains below the S&P 500’s average of 2.3% makes for a frustrating situation. But just how much of a dividend could AAPL theoretically afford?
Double Down on Apple’s Dividend
The most important metric when it comes to assessing the safety of a company’s dividend is the payout ratio. Payout ratio is calculated by simply dividing a company’s annual dividend payment per share by its earnings per share, which indicates roughly what percentage of a company’s profits are devoted to dividends.
The payout ratio is an indicator of how much wiggle room a company has to continue making dividend payments in the case of a downturn in the market or a slump in the company’s business. Generally, I like to see a payout ratio less than 50%, but the lower the better.
Not surprisingly for a company with Apple’s stellar free cash flow, the current payout ratio for AAPL stock is only 21.4%. This ratio is much lower than those of dividend-paying tech rivals International Business Machines Corp (IBM), (38.4%), Cisco Systems, Inc. (CSCO) (40%) and Intel Corporation (INTC) (45.2%).
If AAPL were to double its dividend yield to 4.2%, on the other hand, it would have a higher yield than all three of these competitors and still maintain a payout ratio of only 42.8%, still well short of 50%. A 4.2% yield, on the other hand, would put the stock among the top 12 highest-yielding stocks in the entire S&P 500. In addition, with a five-year projected earnings growth rate of 12.0%, Apple would also offer the highest potential earnings growth among 11 of the S&P 500’s top 12 dividend yielders, behind only REIT Crown Castle Entertainment Corp. (CCI).
The Bottom Line
Despite rumors and speculation to the contrary, AAPL certainly seems to be hesitant to use its cash hoard to pull the trigger on a major acquisition like Tesla Motors Inc (TSLA) or Time Warner Inc (TWX). If that’s the case, the company should be a bit more aggressive with its dividend hikes. Even doubling the dividend wouldn’t put the company in financial stress and it could potentially attract a whole new class of fixed income investors.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
