If a company raises its payout at an average annual rate of 15%, it will double over five years -- a rapid trajectory that most dividend-growth investors will be very satisfied with. It didn't use to be the case, but the tech sector has become a hotbed for promising dividend-growth stocks -- as more companies in the industry have entered transitional business phases and are returning cash to keep shareholders happy as earnings slow.
Within that mold, here's why Apple (AAPL 2.15%), NetApp (NTAP +1.78%), and Activision Blizzard (ATVI +0.00%) should be on the shortlist for investors seeking stocks with fast-growing returned income.
Check out the latest Apple, NetApp, and Activision Blizzard earnings call transcripts.
Image source: Getty Images.
Apple
Apple is transitioning to a more software-focused business to reduce its dependence on what looks like an increasingly cyclical market for its iPhone. It's also been concentrating on returning more cash to shareholders, having made a big stock-repurchasing push and by ramping up its dividend. The company's last payout increase came in at a hefty 16%, and there's a good chance that management will continue to deliver rapid dividend growth while it builds up its software business and develops more substantial innovations to reenergize hardware sales.
Apple has laid out the basics of its plan to bring the company to a net cash neutral position -- meaning that it aims to bring its debt and cash holdings into equilibrium. This strongly suggests that the company plans to continue delivering big payout growth.
Apple has a cash position of roughly $130 billion net of its debts -- a huge war chest to dip into if it wants to dole out dramatic payout increases. The cost of covering the company's current payout distribution also comes in at just 25% of trailing earnings and 23% of trailing free cash flow. So the business is in good shape from all sides to keep delivering substantial dividend growth while still investing to develop new products and services to power its next growth legs.
Shares are priced at roughly 15 times this year's expected earnings and yield roughly 1.7%.
NetApp
NetApp trades at roughly 14 times this year's expected earnings and packs a 2.6% dividend yield. The cloud and data storage company has raised its dividend by 167% over the last five years.
It's worth noting that the pace of payout growth has been somewhat erratic over this stretch, with smaller growth leading up to the company raising its dividend from $0.20 per share in 2017 to $0.40 per share last year, but its dividend remains well covered. Even with that big jump, the company's earnings payout ratio still sits at a reasonable 40%. NetApp's dividend coverage looks even better on the free cash flow front, with the cost of covering its current annualized distribution coming in at just 35% of trailing-12-month free cash flow.
While some companies have been hit hard by the decline of flash memory pricing, NetApp has benefited in some way as it reduces costs associated with transitioning customers to solid state and cloud storage. This has helped the company continue to post solid earnings performance despite slow sales growth. Shares fell following its recent third-quarter report -- as revenue grew just 2% year over year and came in below expectations, but per-share earnings climbed 20% year over year to reach $1.20. Tailwinds for the overall cloud market and increasing adoption for its services as more businesses move from on-premise storage to hybrid cloud solutions give the company avenues to continued expansion.
With the company trading at a conservative valuation and still growing earnings at a healthy clip, NetApp is a stock that has the potential to deliver big payout growth and capital appreciation over the next decade.
Activision Blizzard
Activision Blizzard stock offers a yield of just 0.8% despite its share price having been cut by roughly a third over the last year, so it's not surprising that the video game company hasn't attracted much attention from income-focused investors. That said, the company has increased its payout roughly 85% over the last five years and has boosted its dividend annually for eight years straight. And there are reasons to like the company's long-term outlook in spite of the rough stretch that it's currently enduring.
Shares are down as some of the company's core franchises have weakened, and a lack of surefire new hits in its publicly announced pipeline has dampened confidence in its outlook. The company's guidance for 2019 makes it clear that it's going to be a transition year. But Activision Blizzard still enjoys a strong position in an industry that looks primed for long-term growth, and investors who are seeking rapid dividend growth should appreciate the company's returned-income profile.
Dividends are rare among video game publishers, but Activision Blizzard has been able to blaze the trail in that regard because it's been more consistently profitable than its competitors, and it should be able to deliver big payout increases. The company's forward distribution comes in at just 17% of trailing free cash flow. With the smallest payout ratio of the three companies profiled in this article, Activision Blizzard might have the easiest time doubling its dividend without dipping into its cash pile.
Trading at roughly 20 times this year's expected earnings, Activision Blizzard is a stock that's worth holding for a long time horizon -- and that makes its small but fast-growing dividend component more meaningful. For long-term shareholders, there's the potential for substantial dividend growth, and it wouldn't be shocking to see the stock hit new heights as the company recharges its growth engine and rides momentum from beneficial trends in its industry.
