Apple’s stock has already been riding a roller coaster for the past year topping at $132.97 dropping to $92.00 (-30%) before rallying back to $123.82 (+34%). The day of their earnings release the stock closed at $104.35 before opening at $96.00 (-8%) the morning after. As AAPL continues its slide toward $90 a share the question is whether to buy, hold, or sell the stock.
Most analyses focus on AAPL’s growth prospects relative to declining iPhone sales and whether new initiatives can return Apple, Inc. to a growth company status. But what about holding AAPL as an income stock for future and current retirees?
As investors approach retirement the primary investment objective needs to change from portfolio growth to one that maximizes the portfolio’s lifetime income potential. For income many financial planners recommend an allocation to bonds for both income and safety.
For comparison it would be quite reasonable today to find an investment grade bond, maturing in 10 years with a yield to maturity of 2.45% – the equivalent of AAPL’s latest annualized dividend yield. With the bond an investor that invested $100,000 would receive $2,450 per year for ten years and then get their $100,000 back. Or a total of $24,500.
In my view, the attractiveness of AAPL is that the dividend has been increasing by about 10% for the last couple of years. Unlike the bond investor locked into $2,450 a year of income, an APPL stock investor could be receiving a dividend of $5,776.97 10 years from now if they continue to grow their dividend at 10% a year.
The 10-year total income would hypothetically be $39,046.69. Even if AAPL’s dividend growth rate gets cut in half to 5% in ten years the dividend would still be $3,800 – a 50% raise over what the bond holder would receive. While dividends, let alone dividend increases, are not guaranteed, companies are extremely reluctant to stop or even slow a trend once established.
The question becomes, is APPL likely to continue to pay and increase their dividend annually over the next ten years? While it may seem a stretch that a company can be expected to increase their dividend at a 10% clip, consider that P&G (PG) has done so for 19 years (actually a 10.3% average rate), Chevron (CVX) at 7.9%, Lowes (LOW) at 22%, Genuine Auto Parts (GPC) at 8.5% and Sherwin Williams (SHW) at 11.5% to name a few.
The first thing to notice it that these companies are not characterized as growth darlings. Steady Eddies would be much more appropriate. This is an important consideration. The fact that Apple’s best growth days may be behind them, is not necessarily a negative to a dividend investor.
In fact, in my view, if Apple cannot generate significant shareholder value through stock appreciation, the more likely they are to keep shareholders happy with a fat and growing dividend. The question being is whether cash flow is available to continue to do so.
In the last quarter – the worst in a decade – they generated net income of $10.5 billion, or $1.90 per share. Their annual dividend, after the most recent increase is $2.28/share. Based on this quarter’s earnings, AAPL covers their annual dividend with 3.6 months of earnings.
Based on projected earnings, their payout ratio (the amount of earnings that go to pay the dividend) is just 23%. PG’s payout ratio by comparison is 81.40%. Apple’s iPhone sales would have to virtually fall to zero for AAPL to not have cash flow to pay their dividend.
Future earnings are still a projection. What we do know is that Apple, Inc. is sitting on $161 billion net cash position (cash less debt). With this cash hoard they can pay the current dividend for 14 years without any earnings!
In my view, that cash hoard is the future of AAPL. For the income investor, it represents the potential for a rising income stream throughout retirement. For investors seeking growth, it represents potential cash to invest in future growth and technology.
To put things in perspective, consider this. While Apple has not released a lot of concrete information, everyone presumes that an Apple iCar is in the company’s future.
If instead of building their own manufacturing capacity and distribution network, they could buy Volkswagen for about $70 billion and still have money left over to buy UBS Group AG (UBS) so they can finance consumers’ purchases of their iCars.
This is not to say that buying shares of AAPL is at all similar to buying a ten-year bond. But that is the point.
While a typical stock investor, looking to “beat the market” is very likely to be disappointed holding AAPL stock in their portfolio over the year or two, an income investor can take what appears to be a moderate long-term risk and potentially be potentially rewarded with a rising instead of flat bond income stream.
401 Advisor, LLC is currently long AAPL in both our income and growth portfolios.
Certain of the information contained in this article is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. 401 Advisor, LLC believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
401 Advisor, LLC is a registered investment adviser based in Centerville, OH. Bill DeShurko founded 401 Advisor, LLC in 2003 after becoming frustrated by the losses incurred by individual investors who followed the industry’s typical "buy and hold" approach to investing.
Drawing from his 25 years of experience in the financial services industry, and as a CERTIFIED FINANCIAL PLANNER™ practitioner, Bill developed a strategy for investors who need a high monthly income to maintain their lifestyle.
The strategy is also designed to help conservative investors who seek investment growth through reinvested dividends.