On the surface, Apple (NASDAQ: AAPL) is an easy stock for income investors to pass up.
Its current dividend equates to just a 1.5% yield at a $125 stock price. But it’s a mistake to ignore Apple based on this alone, because it has all the merits of a premier dividend stock. Not only does it have the cash flow to increase its dividend by a huge amount, but it also offers a “stealth” dividend in the form of massive share repurchases.
Each year, Apple updates its capital allocation program in April. That means it’s due to announce its most recent plans in a matter of a few weeks. Expectations for the 2015 capital allocation announcement are high – and for good reason.
Apple is coming off a record year, thanks to the phenomenal success of the iPhone 6. Because of this, there is reason to believe the company is about to unleash a tidal wave of cash on its investors – possibly as much as $150 billion or more in combined dividends and share repurchases.
Apple grew earnings per share by 13% in fiscal year 2014 and 48% in the fiscal 2015 first quarter. The release of the iPhone 6 clearly was the catalyst. This is particularly true when it comes to growth in new geographies. Apple is growing at very high rates in emerging markets, specifically China, where the company’s partnership with China Mobile (NYSE: CHL), the largest wireless carrier in the world, is still in the early stages.
China Mobile has more than 750 million customers, all of whom were previously unable to purchase Apple devices and services. Now that these customers are firmly in the Apple ecosystem, growth in China is exploding.
Revenue in China soared 70% last quarter on a year-over-year basis. Due in large part to continued growth in China, analysts expect Apple to earn $8.59 per share in fiscal 2015, which would represent 33% growth year-over-year.
Such high growth results in a ton of free cash flow. In 2014, Apple generated $50 billion of free cash flow. All this cash is piling up on the balance sheet. At the end of last quarter, it held $177 billion in cash, cash equivalents and marketable investments. This cash is sitting idle on its books, earning very little in interest, meaning it’s very likely the company will deploy a large chunk of this cash to enhance shareholder value.
Two years ago, Apple announced a massive $100 billion capital return program, to be delivered through both dividends and share buybacks by the end of 2015. Last year, Apple updated that program, upping it to over $130 billion. Since the company is nearing completion of this program, it will need to once again update its future capital return plans. Because of its mountain of cash, Apple will be aggressive.
As far as share repurchases, Apple spent $45 billion on buybacks in the past four quarters. With the amount of cash at its disposal, it could easily increase this to $50 billion per year on repurchases going forward.
Meanwhile, its dividend accounts for a relatively small amount of cash – only about $11 billion per year. It can easily afford to increase its cash dividend by 25%. This would push its dividend requirements to about $13.75 billion per year.
As a result, it’s very easy to envision Apple updating its capital allocation program to at least $60 billion per year in combined buybacks and dividends. Over a two- or three-year window, this would amount to $120 billion to $180 billion in total capital returns. The midpoint of this forecast falls right at $150 billion. Apple can finance these capital returns with a combination of organic free cash flow, as well as a modest drawdown of its existing cash balance.
The key takeaway for investors is that it is a mistake to think Apple isn’t a serious dividend stock, just because it offers a relatively low 1.5% dividend yield. It generates so much cash flow that it’s very likely the company will pass through a major dividend increase, as well as a significant share buyback authorization, in a matter of a few weeks. That is why income investors would be wise to think of Apple as a top-quality dividend stock.
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