Take a look at the typical retirement portfolio and you probably will find stocks such as Procter & Gamble (PG), AT&T (T), and Johnson & Johnson (JNJ), dividend-paying stalwarts which offer everyday items such as toothpaste, telecom services, and Band Aids. Cash in, cash out. It doesn’t get much more basic than that.
However, diversification is always important when constructing any type of portfolio, and investors planning for the golden years — or those who are already there — might want to take a hard look at a security not normally selected by those needing extra retirement income: Apple Inc. (AAPL) stock.
AAPL Has What It Takes Financially
Retired investors seeking reliable dividend income would be prudent to look at a few financial metrics before a purchasing any stock, including Apple. Recent earnings and dividend growth history (and future prospects), as well as dividend yield, payout ratio, debt, and valuation are all characteristics that should be examined in more detail.
Conveniently, AAPL stock has what it takes in almost every category:
Earnings growth: Over the past half-decade Apple has managed to grow earnings, the life-blood of dividends, by a compounded annual rate of about 28%. Since re-instituting the dividend in 2012 after a 16-year hiatus the board of directors has authorized dividend hikes of 15%, 8%, and 11%.
Dividend yield: The initial dividend yield is the starting point for any income-oriented investor. While lower than long-time payers Procter & Gamble, JNJ, and AT&T, AAPL’s 2.1% yield is competitive with the 5-year and 10-year Treasury notes and the overall market, as measured by the S&P 500 index.
Payout Ratio: One of the more important criteria that dividend investors should focus on is payout ratio. Future growth is more likely with lower relative payouts. The classic definition is total dividends paid divided by annual net income, although the payout can also be compared to free cash flow.
Currently AAPL stock boasts a very reasonable payout ratio of 21% based upon earnings. And factoring in a stratospheric $70 billion in free cash flow, there seems to be plenty of room for increases.
Debt: It is unlikely that the dividend can be sustained in the future if a company needs to divert resources towards servicing the debt instead. Comparing the debt to equity or to capital are two ways to determine if the debt load is excessive. At the end of the 2015 fiscal year (September 2015) AAPL had a reasonable debt/equity ratio of 0.54 and a debt/capital ratio of 0.35. Morningstar has assigned a AA- credit rating to Apple, indicating that the company is a very low default risk.
Valuation: Although it might not be directly tied to dividend sustainability it is nevertheless important to consider valuation when purchasing a stock. The most widely used calculations involve comparing the current price to trailing and forward earnings, with and without cash factored in.
AAPL stock appears to be fairly valued (some would even say cheap) based upon a TTM P/E of 10.5, and less than 10 after backing out its cash position, well below the market average and its historical levels. Stocks that are fairly valued are more likely to appreciate over the long term. Dividends will most likely follow suit.
A less well-known measure is total capital, including dividends and buybacks, returned to shareholders. In the case of Apple, the company returned a staggering sum of $47 billion in FY2015.
There is no doubt in my mind that AAPL has all the financials in place. However, investors should consider other factors. Intangibles such as recent news, company & industry outlook, and risk can be added to the mix.
Sentiment, in the form of uncertainty about future prospects, always comes into play when discussing AAPL stock. Skeptics claim that sales of the iPhone, which contributes about two-thirds of overall revenue and much of the profit at the company, will falter based upon anecdotal information and indications that suppliers are reporting lower production rates. Apple CEO Tim Cook has stated that such data does not provide a reliable proxy to the company’s performance.
While no one can say for sure what can happen, Apple’s culture, “Think Different”, and popular iOS and Mac ecosystems will likely drive growth into the foreseeable future. There is a vast, mostly untapped market for the iPhone in China and AAPL is taking steps to diversify its product line.
Besides the iPhone there are four other segments that currently generate in excess of $10 billion in revenue (three of which are growing). Throw out the iPhone and Apple revenue would still exceed that of Alphabet Inc (GOOG, GOOGL) and be almost as much as Microsoft Corporation (MSFT). Mac shipments are defying the rest of the PC market and are growing.
Techies are howling that innovation is dead in Cupertino. There is nothing on the horizon in their eyes. However, Apple is usually ranked among the top companies in patent applications every year and innovation is usually a very subjective characteristic anyway. Within the past year Apple has released a new product, Apple Watch, and a new service, Apple Music, both of which have vaulted to the top in their markets.
Retirement portfolios, usually chock full of long-time dividend payers like Procter & Gamble, AT&T, and Johnson & Johnson, should always have room for the new kid in town.
With solid financials in place and (unless proven otherwise with better data) bright prospects for the future, the Apple stock would make a wonderful addition to most well-diversified, dividend-heavy portfolios.
As of this writing, Mark Morelli was long AAPL, JNJ, PG, and T.