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After iPhone Production Cuts, Is Apple's Dividend at Risk?

By Ashraf Eassa – Dec 1, 2018 at 8:00AM

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How safe is Apple's dividend?

The news flow about the sales performance of Apple's (AAPL 2.56%) latest iPhones hasn't been great. That stream of negativity, which includes reports about iPhone production cuts as well as negative data points from some important Apple suppliers, has contributed to the steep decline in the company's share price over the last month or so. 

In light of all of that bad news, I'd like to explore the answer to the following question: Is Apple's dividend safe?

A person using an Apple iPad.

Image source: Apple.

Diving into Apple's dividend

As this article from The Motley Fool's knowledge center explains, there's a financial metric called the "payout ratio" that serves as "a way to measure the sustainability of a company's dividend payment stream."

The payout ratio is calculated simply: Take the company's dividends per share and divide it by its earnings per share (EPS).

Apple pays a dividend per share of $2.92 on an annual basis, translating into a dividend yield of 1.69% (this figure changes based on both the share price and the amount a company pays out in dividends). The company's diluted EPS in fiscal 2018 was $11.91. This means the company's payout ratio based on its most recent full-year results was just 24.5%. 

This means even if Apple were to suffer nothing short of a business catastrophe, and its earnings per share were to be cut in half from its fiscal 2018 levels, it'd still be more than able to pay out the dividend that it currently does. (As an aside, even if Apple's dividend were maintained in that case, the company's stock price would probably plummet.)

What do analysts expect?

Looking at what analysts expect Apple's EPS to be in its fiscal 2019 -- that's the current fiscal year -- as well as the subsequent one, we see that they're expecting EPS of $13.45 and $14.83 in those years, respectively. 

Keep in mind, too, that this EPS growth is likely to come from a combination of net income growth (analyst estimates call for Apple's net income to grow in each of fiscal 2019, fiscal 2020, and fiscal 2021) as well as aggressive share repurchase activity.

Indeed, one thing Apple has been doing with the massive free cash flow it generates is gobbling up its own shares, leading to significant reductions in the total number of shares it has outstanding. A reduction in shares outstanding means that for a fixed level of net income, EPS (which is calculated by dividing net income by share count) increases. 

AAPL Average Diluted Shares Outstanding (Quarterly) Chart

AAPL Average Diluted Shares Outstanding (Quarterly) data by YCharts.

Now, those figures I mentioned above are the average estimates among all analysts. The most pessimistic EPS estimates that I see for fiscal 2019 and fiscal 2020 are $11.54 and $10.98. Even if Apple's EPS were to drop to what those analysts are calling for, the current dividend of $2.92 per share would be sustainable and, frankly, there would still be some room for it to grow. 

Investor takeaway

The bottom line is that because Apple's current payout ratio is so low, its ability to pay its current dividend isn't really at risk, even if the most bearish of analyst EPS estimates over the next couple of years materialize. 

Indeed, in a situation where things are going terribly badly for Apple, I'd imagine that the company would sooner scale back its significant buyback activity before cutting the dividend. 

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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