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Apple Is a Great Dividend Stock Again

By Daniel Sparks - Updated Apr 15, 2019 at 11:14PM

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With the tech giant's shares crashing recently, its dividend is looking tastier.

Apple (AAPL 1.62%) let down investors in its first quarter of fiscal 2019, plain and simple. Initially guiding for revenue between $89 billion and $93 billion for the period, the company appeared poised to post another quarter of year-over-year revenue growth and its highest quarterly revenue ever. For comparison, revenue in Apple's first quarter of fiscal 2018 (Apple's record-high quarter) was $88.3 billion. But CEO Tim Cook said in a letter to shareholders shortly after the quarter ended that actual revenue for the period is more likely to be around $84 billion -- a whopping $7 billion short of the midpoint of Apple's guidance range.

The culprit for the worse-than-expected quarter? Lower-than-anticipated iPhone sales in Greater China. "While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China, Cook said in the letter. 

Apple store in Bangkok, Thailand

Image source: Apple.

With a disappointing quarter in the rearview mirror, it may be tempting for investors to view Apple as a stock with poor prospects. But investors should keep in mind that it's fallen sharply recently, easily making up for a more conservative outlook for the underlying business. Indeed, Apple is looking particularly attractive as a dividend stock -- and here are three reasons why.

1. Apple's dividend yield is more compelling

With the stock sliding from a 52-week high of $233 last fall to about $151 at the time of this writing, the tech giant's dividend yield (total annual dividend payments as a percentage of a stock's price) has risen sharply. When the stock was trading around $230, its dividend yield was about 1.2%. Today, however, the dividend yield sits at 1.9%. The last time Apple had a dividend yield this low was in the beginning of 2017.

2. Cash flow is strong

Despite management's guidance for revenue to decline slightly compared to the year-ago quarter, cash flow can easily support its dividend. Indeed, in his letter to shareholders about the revised guidance, Cook specifically noted that the company's profitability and cash flow generation remain strong.

For the trailing 12 months ending Sept. 29, 2018, free cash flow (cash from operations less capital expenditures) was $64 billion, up from about $51 billion in the 12 months ending Sept. 30, 2017. Furthermore, of Apple's free cash flow in the trailing 12 months ending Sept. 29, 2018, the company paid out just $13.7 billion in dividends.

3. Further dividend growth is likely

Though its dividend yield of 1.9% is much better than it was last fall, it's still notably below the average dividend yield of stocks in the S&P 500 of 2.1%. But Apple makes up for its unimpressive dividend yield with strong dividend growth potential.

This dividend growth potential is evident in the company's low payout ratio, or the percentage of earnings paid out in dividends. Apple has a payout ratio of just 23%, suggesting there's plenty of room for dividend growth.

In addition, the recent trend of dividend growth highlights how management has prioritized annual dividend growth. Since Apple initiated its dividend in 2012, its quarterly dividend has increased at an average annualized rate of 11.6%. 

For investors looking for a strong and sustainable dividend with significant long-term growth potential, Apple stock is a great candidate.

Check out the latest Apple earnings call transcript.

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