Even as its shares have surged of late, there are plenty of reasons investors should remain bullish on tech giant Apple (AAPL +3.26%).
For starters, there's the ongoing iPhone 6 supercycle that should help Apple continue to set records throughout its current fiscal year. There's also the possible refresh of a number of Apple products that should help Apple's product portfolio stay one step ahead of the competition.
However, largely absent from the discussion of Apple's possible growth drivers has been a compelling near-term catalyst that should help to further encourage Apple shareholders.
Capital-return kingpin
Apple's massive, and growing, cash hoard has been well documented. To that end, Apple initiated a capital-return program in 2012, and it's twice increased the amount allocated to that program since then. All told, Apple will have returned an amazing $130 billion in capital to its shareholders by the time its current return plan expires at the end of calendar year 2015.
Here's how Apple's capital-return program has played out so far.
Source: Apple investor relations. All numbers in billions of U.S. dollars.
Given Apple's disproportionately depressed stock price during much of this period, the lion's share of Apple's capital return has been rightfully directed toward stock buybacks. In fact, Apple accelerated its share repurchase activity to capitalize on its undervalued stock in FY 2013 and 2014. But with so much of the focus on Apple's buyback bonanza, Apple's cash payouts have been largely absent from the discussion about Apple's prodigious payouts.
Dividend dynamics
Dividend investing isn't sexy. It's a long-term game, but one that's proved remarkably effective for investors willing to wait long enough for the power of its compounding interest to show itself. And although Apple's recent dividend history remains in the early innings, Apple will almost assuredly write the next chapter of what should be a longer-term trend in sustained dividend growth during its upcoming quarterly report. Here's how Apple's dividend increases have played out in recent years.
|
April 2013 |
April 2014 |
2015 | |
|---|---|---|---|
|
Apple's Dividend Growth Rate |
15% |
8% |
? |
Source: Apple investor relations.
Last year, Apple opted to focus more capital on buybacks, which probably accounts for its aggressive use of the accelerated share repurchase and, in all likelihood, the de-emphasis on dividend growth. For income-seeking investors, that might prove frustrating. However, for the many investors seeking to maximize total returns and not just generate income, the choice by Apple CEO Tim Cook and CFO Luca Maestri to use the most effective tool to enhance overall returns should help build confidence that Apple's executive team is taking a very pragmatic approach to returning capital to its shareholders.
However, there's a case that Apple might reverse this trend with its widely expected dividend increase in April. Why? Because Apple's stock price, although still undervalued in the eyes of many, including me, no longer trades at the brutally undervalued levels of last year.
AAPL P/E Ratio (TTM) data by YCharts
As Apple's shares rallied over the past 12 months, the valuation gap between Apple and the broad market has gone from chasm-esque to more moderate before backing out Apple's cash balance. As a result, buybacks have become an increasingly less accretive tool to grow Apple's earnings per share. And in this new, more fairly valued world for Apple stock, it certainly makes some sense that Apple might take a more balanced approach in returning capital to its investors, a theory that becomes all the more compelling when you consider the following.
|
AAPL |
S&P 500 | |
|---|---|---|
|
Current Dividend Yield |
1.50% |
1.87% |
Sources: Yahoo! Finance and multpl.com.
Apple would need to raise its dividend by about 25% to match the current yield of the broader stock market. That'd be an aggressive move, but one that isn't so far-fetched as to be unrealistic. Such an increase could also assuage concerns that last year's 8% dividend might reflect a more tepid attitude toward dividend growth.
However, it's also worth noting that Apple probably isn't going to base its dividend increase decision on wider market conditions. Either way, a dividend increase from Apple is a virtual lock this April, so investors should watch closely as the underappreciated, but critical, long-term Apple investing storyline plays out in a few short months.
