Apple's (NASDAQ:AAPL) 2.3% dividend yield may seem small compared to other solid dividend stocks. But its less-significant payout doesn't disqualify Apple as a potential dividend play. In fact, looking beyond the yield reveals that Apple is potentially one of 2013's best dividend stocks.
4 dividend stocks
To analyze Apple as a dividend stock, let's compare it with four other stocks that make frequent appearances on "best dividend stocks" lists.
Solid income investments require three criteria:
- A meaningful diviend yield.
- An ability to generate significant free cash flow, or FCF.
- A relatively low payout ratio.
The result is a nice 3.1% dividend yield and a conservative payout ratio of 58%. A payout ratio is the fraction of net income a company pays to its shareholders in dividends. The lower the ratio, the less likely it is that the company's dividend would take a hit if its fundamentals turned awry. A payout ratio of 58%, therefore, leaves room for this cash cow to maintain a solid dividend going forward.
Procter & Gamble
Amid intense competition and a sluggish global economic environment, Procter & Gamble is struggling with slowing revenue and an overextended expansion. But that doesn't stop the company from throwing off cash. Over the trailing 12 months, the company has generated nearly $0.13 of FCF per dollar of sales. In fact, during the last three years alone, P&G has generated more than $36 billion in free cash flow.
At today's price, Procter & Gamble's dividend yields 2.9%. It has a conservative payout ratio of 57%.
Diversification, extensive distribution, and powerhouse brands -- Coca-Cola has it all. The company's powerful position as a global leader in consumer beverages results in an extraordinarily consistent ability to produce generous amounts of FCF for shareholders. In fact, over the last 10 years, the company's FCF-to-sales ratio only dipped below 15% once.
Coca-Cola has a meaningful dividend yield of 2.7% and a conservative payout ratio of 52%.
Apple's products carry significant brand equity, evident in the company's trailing-12-month gross margin of 42% -- the envy of the industry. The result is a FCF-to-sales ratio of 28.1%, far higher than any of the three companies listed above. Though some tech companies like Microsoft and Google have significant FCF-to-sales ratios as well -- 37.8% and 26.6%, respectively -- that's because their revenue comes from software and/or services, which have higher margins. Apple stands alone as the world's most profitable consumer electronics company.
Yes, Apple's dividend yield of 2.3% is lower than all three of the companies mentioned above. But its extremely conservative payout ratio of just 12%, combined with its ability to throw off cash, means that Apple's dividend could grow significantly in the future.
Apple's fortunate cash problem
Though Apple's cash hoard is often quoted as $137 billion, the net figure of liquid cash and assets that aren't needed to run the business is actually closer to $101 billion. Either way, Apple does have a fortunate cash problem.
Less than a year ago, Apple announced a $45 billion plan to return cash to shareholders and repurchase shares. Already Apple has executed $10 billion of this plan -- but it's not enough. This cash hoard is growing faster than Apple is spending it. In the company's first quarter alone, Apple generated $23 billion in cash from operations.
Now the question isn't whether or not Apple is going to return more cash to shareholders, but how much more cash will Apple return to shareholders, and in what manner? On Feb. 7, Apple responded to David Einhorn's proposal for a 4% yielding preferred share that would trade at approximately $32 per share. In the press release, Apple stated it would "thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock" and that the management team and board of directors "have been in active discussions about returning additional cash to shareholders."
Apple's superior ability to throw off tons of cash, its meaningful dividend yield, its very conservative payout ratio, and a fortunate cash problem make Apple a great candidate for 2013's best dividend stock. Better yet, at just 10.4 times earnings, Apple is a bargain, making it a great potential fit for any Fool's dividend portfolio.