Apple (AAPL) – ‘AAA’ Dividend Safety – We first addressed Apple’s dividend safety almost two years ago, in early 2020. Since the article was published, Apple’s stock price has more than doubled and is nearing a $3 trillion market capitalization. Few investors would have thought this value possible even a few short years ago. For perspective, Apple (APPL) is the largest market capitalization stock globally and exceeds the market value of Microsoft (MSFT), the number two market cap stock, by almost $400 billion. In addition, the company is more than three times as large as Facebook (FB), the number seven company by market cap.
The main interest for investors is that Apple is a dividend growth stock, having raised the dividend for nine years in a row. Hence, the stock is a Dividend Challenger. In addition, there have been changes to the balance sheet and substantial revenue and earnings growth. For instance, Moody’s recently announced an upgrade to Apple’s credit rating to ‘Aaa,’ the highest possible. More on this change is below. Hence, it is time to reanalyze Apple’s dividend safety.
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Overview of Apple Stock
Apple traces its history back to 1976 when Steve Jobs, Steve Wozniak, and Ronald Wayne worked on the first Apple computer. The company was incorporated in 1977 and conducted an IPO in 1980. The founders left Apple in 1985, but Steve Jobs returned in 1997. He revitalized the company and launched the iMac and iPod in 2001, followed by other products and a retail chain. However, the launch of the iPhone in 2007 started Apple on its path to the dominance of consumer electronics.
Today, Apple’s products and services include the iPhone, iMac, MacBook, AirPods, Beats, Apple Watch, Apple TV, Apple Pay, Apple Card, Apple Music, etc. Apple focuses on consumers and small businesses. Apple is extending its reach and brand even further. Reportedly, Apple is working on a car, an AR device, and foldable iPhones. Furthermore, behind the scenes, Apple is developing chips for its computers, phones, and tablets. The company is starting to develop modem chips. Moreover, Apple is the best global brand as ranked by Interbrands.
Apple’s total revenue was an astounding $365,817 million in fiscal 2021 (fiscal year ends at the end of September) and in the LTM.
Revenue and Earnings Growth for Apple
Apple’s growth is nothing short of amazing. In 2011, Apple’s revenue was already over $100 billion; a value few companies can hope to match. However, Apple has continued to grow by adding products and services. As a result, revenue tripled to more than $365 billion. Operating income is now more than $100 billion, and net profit is nearing $100 billion.
Apple’s products have created an ecosystem. For example, consumers buying an iPhone may use Apple Pay next and subsequently get an Apple Card. They may follow this purchase with AirPods and a PowerBook. The ease of use and simplicity for most devices and services create loyal customers who are repeat buyers. Next, Apple’s products improve each year. The latest iPhone has more features, a better camera, more storage, and faster speeds than the previous iPhone. Lastly, consumer electronics eventually wear out or become obsolete driving future sales.
In the most recent quarter, Apple’s revenue surged 29% to $83,360 million from $64,698 million, and diluted earnings per share rose to $1.24 from $0.73 on a year-over-year basis. The company stated all geographic segments set records. Furthermore, the Services and Mac categories set revenue records.
Apple’s Dividend Yield, Dividend Growth, and Dividend Safety
Dividend Yield
Apple paid a dividend from 1987 to 1995, when it was omitted. The dividend was reinstated in 2012. The most recent quarterly dividend increase was about 7.3% in April to $0.22 per share from $0.205 per share. The forward dividend yield is low at about 0.50% and well below the trailing 5-year average, as seen in the chart below from Portfolio Insight*. Apple’s rising stock price has simultaneously lowered the dividend yield since the dividend growth rate is lower than the stock price gains.
Dividend Growth
Apple is a little stingy on dividend growth, instead, focusing on share repurchases. For example, in fiscal 2021, Apple repurchased $85,971 million in stock but paid $14,467 million in dividends. However, even though this disparity is significant, Apple is still one of the biggest dividend payers in 2021, coming in fourth by cash flow. Moreover, Apple will likely be in the top three in 2022, especially since the current number two, AT&T (T), is cutting its dividend.
Apple grew the dividend at a compound annual growth rate (CAGR) of about 9.73% in the past 5-years and 9.5% in the trailing 3-years. In absolute and relative terms, these values are excellent. The Rule of 72 indicates the dividend will double in roughly 7.2 years. However, Apple can be more generous with the dividend increases since the payout ratio is about 15.4%.
Dividend Safety
Apple’s dividend is extremely safe based on earnings, cash flow, and the balance sheet. Apple’s history and expected future growth place the dividend on sound footing. There is little chance of a dividend cut or suspension.
In fiscal 2021, Apple paid a dividend of $0.865 per share, and diluted non-GAAP earnings were $5.61 per share. These numbers give a payout ratio of approximately 15.4%. On a forward basis, the dividend rate is roughly $0.88 per share, and the consensus diluted non-GAAP earnings is $5.71 per share, giving a payout ratio of around 15.4%. This percentage is a really low value for payout ratio and well below my threshold of 65%. Apple has room to grow the dividend, and dividend safety will not be affected.
Free cash flow more than covers the dividend. In fiscal 2021, operating cash flow was $104,038 million, and the dividend required $14,467 million. These numbers result in a dividend-to-FCF value of 13.9%. Again, this is a low value and well below my 70% or lower target number. Apple’s operating and FCF is growing faster than the dividend, and thus it is probable this ratio will remain low in the foreseeable future.
Balance Sheet
Apple has a stellar balance sheet. At the end of fiscal 2021, the company had short-term debt of $6,000 million in commercial paper and $9,613 in term debt. Long-term debt was $109,106 million. This debt was offset by $62,639 million in cash, cash equivalents, and marketable securities. Additionally, Apple has another $127,877 million in marketable securities categorized as non-current assets. At the end of fiscal 2021, interest coverage was over 41X, and the company had a net cash position. Therefore, there is little if any risk of Apple not paying the dividend.
Furthermore, the credit agencies recognize Apple’s liquidity, cash flow, and revenue growth. Moody’s recently raised Apple’s credit rating to ‘Aaa,’ the maximum possible with a stable outlook. Apple joins Microsoft (MSFT) and Johnson & Johnson (JNJ) as the only triple-AAA-rated US companies. Moody’s analyst, Raj Joshi stated said the upgrade is due to Apple’s,
“…exceptional liquidity, robust earnings that we expect will continue to grow over the next 2 to 3 years, and its very strong business profile,”
and,
“Apple’s very strong business profile reflects its substantial operating scale, a large installed base of products and users of its services, strong customer loyalty, and premium brand positioning.”
The other credit rating agencies will probably soon follow and raise their ratings as well.
Final Thoughts on Apple (AAPL) – ‘AAA’ Dividend Safety
Apple is an attractive dividend growth stock to own despite the low yield. The dividend is highly safe and will probably grow at around 10% per year. Apple is focused on share repurchases and maintaining its pristine balance sheet. Shareholders should expect a rising stock price in place of a high dividend yield or robust dividend growth. The share count has dropped by almost 10 billion shares in the past decade. Apple has built an ecosystem of more than 1.65 billion devices that should drive the top and bottom lines for the next few years. Combined with brand strength and the product portfolio, it should translate into solid shareholder returns. However, the law of large numbers means that Apple will have a more challenging time generating high growth rates.
Disclosure: Long AAPL
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
Apple said they would keep returning cash to shareholders until they are net debt neutral. That’s a good sign for years to come.
Nice write up