The Apple Dividend for Passive Income

Apple Dividend Stock Analysis

Apple dividend growth has been attractive in recent years.  And Apple stock has retreated from all-time highs. So let’s check out the Apple dividend from a dividend growth stock investors perspective.

In a Dividends Diversify review of companies in the technology sector,  I noted the gigantic cash holdings these companies carry.  In addition, I questioned if the 2017 tax act might result in larger dividend increases and faster dividend growth from companies in the sector.

And Apple was one of 5 cash-rich, blue-chip technology companies highlighted in the article.  So let’s take a closer look at this well-known tech company.

Please join me for an Apple stock analysis right now. And note that the company’s stock trades on the Nasdaq stock exchange under the symbol, AAPL.

COMPANY BACKGROUND

Headquartered in Cupertino, California, Apple designs manufactures and markets mobile communication devices, media devices, and personal computers. 

In addition, they sell a variety of related software, services, accessories, networking solutions, and third-party digital content and applications.

The company’s hardware products include the:

• iPhone smartphone
• iPad tablet computer
• Mac personal computer
• Apple Watch
• Apple TV

Apple’s software includes:

• macOS, iOS, watchOS and tvOS operating systems
• iCloud
• Apple Pay

Digital content and services are composed of the:

• Apple Music
• iTunes Store
• App Store
• Mac App Store
• TV App Store
• iBooks Store

APPLE DIVIDEND YIELD

Apple is paying an annualized forward dividend of $3.08 cents per share.  This represents a 1.7% Apple dividend yield at the recent Apple stock price.

APPLE DIVIDEND GROWTH RATE

1 Year	3 Years	5 Years
13.3%	11.2%	10.8%

The current Apple dividend was initiated in mid-2012.  During that year they started paying a regular quarterly dividend and have continued to do so ever since.

And they have also increased the Apple dividend every year since 2012. This represents a 7-year streak of consecutive annual dividend increases. Prior to 2012, the company had not paid a dividend to its shareholders since 1995.

In addition, during May of 2019 management announced their latest 5.5% dividend increase.  This lower percentage increase was clearly a break from the past trend. In fact, the announcement was a disappointment to me.

For my planning purposes, I am going to assume an 8% annual dividend growth in future years.

Source: Apple Investor Relations – Dividend History

APPLE REVENUE

Apple’s revenue peaked in 2015 at $234 billion.  During 2016, as revenue declined there were concerns about the future revenue generating capacity of the company.

First Revenue Uncertainty

At the time, the iPhone accounted for a very large portion of the company’s revenue and profit.  The smartphone market was maturing.  And their competition was catching up.

In addition, customers were upgrading their phones less frequently.  This was mainly due to the annual changes from phone to phone becoming less dramatic.

As sales slumped, so did the stock price.  The stock made its most recent bottom of $90 per share in May 2016.

Then Revenue Growth Resumes

Since then, revenues and the stock have taken off.  The company has gone through a fundamental transformation.  They have turned a business centered on how many devices it ships into one built around high-end features and services for those devices.

Revenue reached a new high in fiscal 2018 checking in at a little over $265 billion.  In contrast, revenue growth appears to be stalling as we move through this year. Estimates for 2019 reflect a slight decline from 2018.

Revenue & Product Pricing

Finally, Apple has implemented a premium pricing strategy with its newer iPhones. High prices may protect and even enhance their profit margins, but higher prices may come at the expense of lower unit volumes in future years.

APPLE DIVIDEND PAYOUT & EARNINGS

From a 2018 earnings perspective, the company achieved almost 30% year over year growth.  And with that growth, 2018 was a record year.

2019 is a different story. Revenue growth is stalling, and so are profits. Earnings per share are expected to be down slightly in 2019.

Apple Dividend Payout Ratio

The Apple dividend payout ratio is running at less than 25% of both earnings and free cash flow. This is certainly a very secure level. The Apple dividend appears safe and has room to grow even if earnings growth falters in the near term.

A lower dividend payout ratio, like Apple’s, is a positive metric.  It shows the company has ample room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce the dividend.

APPLE DIVIDEND IS WELL COVERED BY FREE CASH FLOW

Speaking of free cash flow, Apple generates plenty of cash. They generated more than $64 billion in 2018 as the chart below shows.

Management directs most of that excess cash toward share repurchases. That’s another shareholder-friendly practice along with paying dividends.

However, I would have preferred some of that cash allocated to share buybacks be directed toward a larger 2019 Apple dividend increase.

Apple is proud of how much cash they return to shareholders. They have a space on their investor relations website dedicated to communicating those results on an annual basis. You can check it out here: Apple return of capital and net cash position.

APPLE CREDIT RATING

Apple carries an Aa1 and AA+ credit rating from Moody’s and S&P, respectively. This is a very strong credit rating of “investment grade – very low credit risk.”

The rating is only one grade below triple-A, representing the highest possible credit rating awarded. Only two US companies hold the highest triple-A credit rating. They are Johnson & Johnson and Microsoft.

So, based on its credit rating, it is pretty clear that Apple will be able to meet both its short term and long term obligations as they come due.

APPLE BALANCE SHEET

Finally, Apple carries a debt to equity ratio of 1.07 times. Taking the credit ratings and capital structure into account, Apple has a very solid balance sheet. It provides further support for the overall safety of the Apple dividend.

APPLE STOCK VALUATION

Let’s judge value in several ways:

• Dividend Discount Model
• Price to earnings ratio
• Morningstar fair value estimate
• Personal Finance investment newsletter buy target

Apple Dividend Discount Model

The single stage dividend discount model considers several factors I have discussed thus far.

• Current annual dividend payment – $3.08 per share
• Projected dividend growth – 8%
• My desired annual return on investment – 10%

Using these assumptions, the dividend discount model calculates the fair value of Apple stock at $166 per share.

Apple Stock Price to Earnings Ratio

The Apple stock price to projected 2019 earnings sits at about 16 times.  To compare, the S&P 500 forward price to earnings ratio for 2019 is 17 times.

Based on the price to earnings ratio, Apple stock is trading at a discount to the market as a whole.  An Apple stock price of $198 per share would have it trading at the same multiple as the market.

Morningstar Fair Value

The investment analysis firm Morningstar believes Apple is fairly valued at $200 per share.

Source: Morningstar

Personal Finance Investment Newsletter

Finally, the longtime investment newsletter, Personal Finance places a buy target on Apple stock at $185 per share.

Source: Personal Finance

APPLE STOCK VALUATION SUMMARY

We have looked at a number of valuation methodologies that suggest a range of values for Apple stock. 

Here is a summary:

• Dividend Discount Model – $166 per share
• Price to Forward Earnings Ratio to par with the market – $198
• Morningstar Fair Value – $200 per share
• Personal Finance Newsletter buy target – $185

Finally, I have a very conservative approach to my Apple shares.  I won’t consider buying more Apple stock unless the dividend yield is at least 2%.

Regardless of the other suggested stock values, that puts my personal Apple stock recommendation at a target price of $154 per share.

APPLE DIVIDEND WRAP UP

Apple isn’t your father’s dividend growth stock.  It doesn’t operate in your traditional steady demand industry like consumer staples or utilities.

The company’s growth is partly dependent on managing short product life cycles.  In addition, continual and consistent product and service innovation is an ongoing requirement for growth.

Apple stock is one of my smaller holdings. Based on this Apple stock review, I intend to hold and will consider buying more at a price below $154 per share.  This price equates to a 2.0% Apple dividend yield.

Unfortunately, the dividend yield for Apple is still a little lower than I prefer. But I do make exceptions for high-quality companies, like Apple.

I will let this winner ride on in my portfolio. And look to put new money elsewhere for now.  There are many other good dividend-paying stocks in the market for me to consider before adding to Apple at this time.

Related: IBM stock and dividend analysis

Related: Dividends Deluxe Model stock portfolio

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This article, or any of the articles referenced here, is not intended to be investment advice specific to your personal situation. I am not a licensed investment adviser, and I am not providing you with individual investment advice. The only purpose of this site is information & entertainment. We are not liable for any losses suffered by any party because of information published on this blog. See this site’s Disclaimer and Privacy tab for more information.

I currently hold Apple stock and collect the Apple dividend.