Apple Inc. (NASDAQ:AAPL) is the world’s largest technology company, and it once was one of the best growth stocks on the market. It has shifted gears, though, and now Apple stock is one of the more promising dividend growth plays on the market.
AAPL paid its first dividend — at least since 1995 — on Aug. 16, 2012. It paid investors 38.9 cents per share on a split-adjusted basis.
The payout has been hiked four times since, and currently sits at 57 cents per share. That’s a compound annual growth rate of 10%, with 2017’s dividend increase expected to be similar. After all, AAPL stock only has a payout ratio of 27% of its trailing earnings and a 1.6% yield.
When you look at shareholder yield — dividends plus buybacks — Apple’s record is even more impressive. The company spent $12.2 billion on dividends and a whopping $29.2 billion on share repurchases in 2016. That works out to a shareholder yield of 5.6%.
AAPL is returning capital at a blistering pace.
However, while most shareholders are ecstatic with the dividend on Apple stock, allow me to present an alternate argument:
Apple should cut its payout … and maybe even eliminate it altogether.
Apple, Meet Alphabet
Let’s take a minute to compare Apple to one of its peers, Alphabet Inc (NASDAQ:GOOGL).
Alphabet’s dividend policy is pretty clear. It said in its 2016 10-K filing, “We have never declared or paid any cash dividend on our common or capital stock. We intend to retain any future earnings and do not expect to pay any cash dividends in the foreseeable future.”
Alphabet can easily afford a dividend, too. It made $19.5 billion in 2016, or $28.32 per share.
The reasoning behind this is simple. Alphabet is aggressively investing in the kinds of projects that can really boost its top line. It has been working on a self-driving car since 2009. It invested more than $6 billion on Google Fiber. Alphabet also teamed up with Fidelity to invest $1 billion in SpaceX.
In total, Alphabet spent $13.9 billion on research and development in 2016, as well as $10.2 billion on capital expenditures.
Apple is still investing in the future, but not as aggressively as Alphabet. AAPL spent $10 billion on research and development and $13.5 billion on capital expenditures in 2016, despite making a net profit of $45.7 billion.
In other words, Alphabet reinvested $24.1 billion back into its business in 2016 while earning $19.5 billion. Apple reinvested $23.5 billion while earning $45.7 billion. AAPL barely reinvested half of its earnings back into its business.
AAPL Needs to Make Some Acquisitions
Apple does have some exciting plans. One of the tech world’s worst-kept secrets is Apple’s plans to somehow be a part of the car of the future. It has also been working in the virtual reality space, and many expect big improvements to Apple TV. These investments are great. But I don’t think they’ll be enough to usher in a new era of growth.
It’s time for Apple to go shopping.
Apple could easily take the $41 billion it gave back to shareholders in 2016 and use it to make a huge splash.
Say Apple agreed to buy Netflix, Inc. (NASDAQ:NFLX) at a 50% premium to today’s price — so, roughly $91 billion. AAPL could pay off the deal in just a few years from its existing cash flow alone, and would own a company that has doubled revenues in the last three years.
Apple’s main growth driver today is service revenue. In its most recent quarter, AAPL grew its top line 3% on a quarter-over-quarter basis. It grew services revenue by 18%. Acquiring Netflix would would not only supercharge that division, it would give Apple access to Netflix’s whole library of content.
The Bottom Line on Apple Stock
There’s a reason why AAPL trades at the same multiple as the rest of the market. Investors assume — rightfully so — that it is a mature company with no immediate growth prospects. If Apple slashed its dividend and announced it was using that money for acquisitions, investors would sit up and take notice.
There’s no guarantee such sentiment would send Apple stock soaring right away. In fact, it’d be easy to see the market taking the short-term view that something is amiss, and selling AAPL as a result.
But if executed right, such a strategy would make Apple shareholders richer in the long run.