Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I'm going to highlight technological powerhouse and former largest company in the world, Apple (NASDAQ:AAPL).
One bad Apple spoiled the bunch?
We could probably debate from here until next week what's wrong with Apple over the past couple of months. For time's sake, I'm not going to do that. What I will do is point out the fact that Apple's iPhone sales are slowing on a year-over-year basis as Samsung and other manufacturers running on Google's (NASDAQ:GOOGL) Android-based operating system give Apple's operating system a run for its money. In particular, the Samsung Galaxy S III, which offers a bigger screen and file-sharing capabilities with a touch, are slowing sales of the still highly coveted mobile device.
Competition in tablets is another area where Apple isn't losing the war, but it's needed to share its slice of the pie. Amazon.com (NASDAQ:AMZN) has a fully Internet-capable tablet in the Kindle Fire that also provides the convenience of downloading books from its massive content library. Most notable about the Kindle Fire is that its new 8.9-inch model is priced at just $299. Compare that to the newest generation iPad, which almost always goes for $429 or more for the base model.
All this together, along with the simple fact that Apple didn't stomp its usually conservative guidance into oblivion in the holiday quarter, was enough to throttle the share price. Short-term concerns and emotional trading aside, Apple is about as cheap as it's been in a decade on an earnings basis and looks like one of the stronger buys in the market.
Emotions got the better of you?
To begin with, Apple's smartphone sales are just fine and its market saturation in emerging markets and BRIC countries like Russia is still at a minimum, leaving plenty of room for growth. In that "monstrously bad" first-quarter, Apple delivered a record 47.8 million phones from 37 million in the year-ago period.
Furthermore, in the fourth quarter, Apple was the only smartphone platform that gained market share, rising from 34.3% to 37.8%, according to comScore. Google's Android devices lost 1.3% to 52.3%, BlackBerry (NYSE:BB) shed 1.9% to 5.9%, and Microsoft, whose operating system is found on the Nokia (NYSE:NOK) Lumia, dipped 0.1% to 3.1%. Part of this is a direct reflection of the multiple failures of BlackBerry and Nokia to meet consumers' wants and needs in a timely fashion. The Nokia Lumia was a long-delayed work in progress with the company abandoning its in-house Symbian operating system for Microsoft's Windows OS, ultimately delaying its launch. Even worse is BlackBerry, which has suffered multiple launch delays and isn't expected to roll out its BlackBerry Q10 (with its famed keyboard) until sometime in mid-May to mid-June. As Apple's competitors falter, it's picking up market share.
Criticism that Apple's innovation engine has stalled are also grotesquely overstated. Just this year alone, Apple is expected to spend approximately $10 billion in capital expenditures -- $1 billion in its stores and another $9 billion on equipment in a variety of other areas -- which is up $2 billion from the previous year, according to Apple Insider. Apple is continuing to modernize the iPhone and iPad and is working its way into other forms of digital and streaming content via Apple TV and Apple Radio. When push comes to shove, you'll find plenty of people still clamoring to get their hands on Apple's latest devices.
Another reason to buy Apple is its sheer financial dominance. There are few other companies you can invest in that boast $137 billion in cash, are capable of producing well in excess of $40 billion in annual free cash flow, or that are valued at just 8.5 times forward earnings with a growth rate exceeding 16%. Apple's stores are also tops among retailers when it comes to sales-per-square foot... by a mile!
Say hello to shareholder incentives
However, the real allure of Apple, beyond what I've mentioned above, is the simple fact that it's begun giving back to shareholders. Last year, Apple announced it would be repurchasing $10 billion worth of its own shares . Although that's but a pittance of Apple's outstanding shares, it nonetheless represents a commitment on CEO Tim Cook's part to improve shareholder value.
The real bonus came in the form of a $2.65 per-quarter dividend. Apple's dividend, which is currently yielding 2.5%, only amounts to a payout ratio of 24% based on this year's projected EPS, and leaves plenty of room for future growth. At the rate Apple has been cashing in on iPhone and iPad sales, it seems only logical that this dividend is likely to head even higher.
We've clearly heard both sides of the argument on Apple many times over, but when all is said and done, Apple makes money – a lot of money – and that's ultimately good news for shareholders. Apple's cash flow and cash balance are unrivaled in the tech world; its innovative capacity far understated and underappreciated; and its dividend is merely the icing on the cake. This is a dividend-paying company you can buy with confidence.