Apple (AAPL +0.54%) and Microsoft (MSFT 0.13%) have historically had one of the fiercest rivalries in the business world. Both companies are powerful cash generators, and they're also among the soundest dividend stocks in the tech industry. Which one is a better buy for dividend investors right now?
A brave new Microsoft
Microsoft was once the undisputed king in the tech world, but things changed as the company lagged behind Apple and other players in the mobile computing revolution over the past decade. However, since CEO Satya Nadella took the reins last year, the company is much better aligned toward the main trends in crucial segments such as cloud and mobile.
Source: Microsoft.
Microsoft is still a company in transition, and this period is taking its toll on overall financial performance. On the other hand, there are some remarkably encouraging trends to consider. The company's commercial cloud segment surpassed the $8 billion annualized run rate last quarter, a whopping 88% year-over-year increase. Management believes the cloud business is on track to producing $20 billion in annual revenue by fiscal 2018.
Office is doing particularly well under the new industry paradigm. Microsoft has over 15 million Office 365 commercial customers, and new customers are signing in at a rate of nearly 1 million new customers per month. The company surpassed 150 million downloads of Office Mobile across both IOS and Android devices in the last quarter.
Individual and corporate customers alike have been receptive to the recently launched Windows 10. It's too early to tell whether the new operating system will generate enough traction to jump-start sales in the Windows division, but management sounds optimistic: Microsoft has a goal of 1 billion active Windows 10 devices by fiscal 2018. If the company can, in fact, deliver sales figures around that target, it could do wonders for Microsoft from a financial point of view.
The incredibly big Apple
Apple is one of the most remarkable success stories in the tech industry in recent years. It is at the same time one of the main drivers of the mobile computing revolution and a leading beneficiary from it.
The iPhone is the biggest contributor by a wide margin, generating a gargantuan 63% of Apple's total revenue during the past quarter. iPhone unit sales grew 35% versus the same quarter last year, and this growth allowed Apple to deliver an impressive 33% increase in total revenue. Earnings per share did even better, growing 45% year over year on the back of expanding profit margins and a reduced share count by way of stock buybacks.
Source: Apple.
The fact that Apple depends so much on the iPhone is a considerable source of risk in case there's a slowdown in growth from demand saturation or technological disruption, so it's important for the company to continue innovating and staying on top of industry trends.
However, when considering the company's brand power and track record of success, everything suggests that Apple has what it takes to continue thriving over the middle and long term.
Dividends comparison
Microsoft stock pays a 2.8% dividend yield at current prices, considerably higher than Apple and its 1.75% yield. When it comes to current income from dividends, Microsoft is clearly the winner.
Microsoft produced nearly $23 billion in free cash flow during fiscal 2015, and dividends absorbed less than $10 billion of that money. The company has abundant room to continue raising payments.
Still, Apple is even more comfortable than Microsoft when it comes to financial muscle to raise dividends. The business brought in over $60 billion in free cash flow in the nine-month period ended in June, and dividends amounted to $8.6 billion, or only 14% of free cash flow over the period. In addition, Apple looks better positioned than Microsoft when it comes to sales and cash flow growth in the coming years, so Apple is clearly ahead of Microsoft regarding dividend growth prospects.
For investors looking for a high dividend yield and current income, Microsoft is the better choice. However, Apple is poised to deliver superior increases in both dividends and cash flows, so chances are that Apple will beat Microsoft on a total-return basis, meaning dividends plus capital gains, over the coming years.
