Since initiating a regular dividend in 2012, Apple (AAPL 2.45%) is increasingly becoming known as a solid bet for dividend investors. But is the stock a buy?
Cook promises dividend increases
During Apple's annual shareholder meeting in February, some income investors who own Apple stock may have been relieved to hear Apple CEO Tim Cook promise to continue to provide investors with annual increases.
Of course, this wasn't news. Apple had already promised investors this several years ago. In the company's April 2014 press release announcing a dividend increase, the release stated Apple "plans to increase its dividend on an annual basis."
But the CEO's reaffirmation that Apple is still planning annual dividend increases further solidified the stock as a dividend investment.
Apple has increased its dividend every year since initiating it in 2012, averaging about an 11% annual increase. The company increased its quarterly dividend from $0.47 to $0.52, or from $1.88 to $2.08 on an annual basis, last April.
Apple management said during the company's most recent earnings call it will announce an update for its capital return program when it reports second fiscal quarter results. Therefore, investors can expect to hear by how much the company chooses to boost its dividend in April.
If Apple maintains its current rate of dividend increases, the company will announce a dividend of about $0.57 to $0.58, representing approximately an 11% hike to the dividend.
Dividends come easy for Apple
As income investors know, dividend increases alone aren't enough to make a stock enticing as a potential income investment. But, fortunately, Apple possesses several other key characteristics that really drive home the value in the stock as a dividend investment.
1. Apple's business has staying power. The company's pricing power and its loyal customer base are clear evidence of its powerful and enduring brand. While the company may derive its revenue from a concentrated portfolio of products, which is prone to be volatile on a year-to-year basis, the steadiness in Apple's brand power with its entrenched customer base is a testament to the long-term potential for the brand and business.
2. There's plenty of room for dividend growth. Currently paying out just 22% of earnings in dividends, there is huge room for further dividend increases -- even if the company struggles to grow EPS.
Or, here's another way to look at the wiggle room for Apple's dividend: Of Apple's $63 billion in trailing-12-month free cash flow, it paid out just $11.7 billion in dividends during this same period.
3. Share price appreciation is likely, too. Currently trading with a price-to-earnings ratio of 11, Apple stock trades at a significant discount to the average earnings multiple assigned to stocks in the S&P 500. And this multiple is particularly conservative in light of the company's recent growth. During the trailing twelve months, Apple's EPS increased 27%.
In other words, not only is Apple's dividend likely to increase at meaningful rates over the long haul, but the stock also appears undervalued.
While a 2.2% dividend yield is fairly small, it's enticing when viewed in light of the stock's conservative valuation and the dividend's potential for further increases.
Apple stock, therefore, is a great bet for dividend investors looking for an enduring and growing stream of cash payments.