I'm on the hunt for dividends. Not just any dividends, but the kind that are secure and certain to grow over the next 10 years. I figure that if I can find a company with a decent dividend yield, and that dividend is likely to grow, then the capital appreciation portion of the investment is bound to take care of itself. A growing dividend means a growing level of cash flow. And a growing level of cash flow is bound to drive up the intrinsic value of a company and its stock price.
Previously I've written about Apple (AAPL) here and here. Both times I wrote that I felt Apple was not for me as an investment because the sheer size of the company frightened me. I just felt that Apple is so successful and generates such enormous amounts of cash flow that achieving future growth, or even simply maintaining current levels of performance, has to be a very difficult task.
Adding to my concern was the fact that I just don't think I'm smart enough to predict with any reasonable certainly what Apple's business will look like 10 years from now. After all, this is a technology company that also must be popular with consumers. Fickle consumers and technology make for an unpredictable combination, which I tend to avoid.
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As you might imagine from looking at the chart above, I'm not disappointed that I decided to take the plunge on Apple. But now I return to the company from the viewpoint of an investor looking for a secure and growing dividend yield. That perspective, combined with the valuation of Apple greatly reduced after the stock price collapse, makes Apple look a lot more interesting to me.
- Shares Outstanding: 940 million
- Share Price: $430
- Market Capitalization: $404 billion
- Net Cash: $130 billion
- Enterprise Value: $404 billion less $130 billion = $274 billion
I must say that every time I look at Apple's balance sheet I have to rub my eyes to make sure what I'm seeing is real. It is truly incredible that one business has built up that much cash over the span of just a few years. The valuation on Apple is intriguing. Over the last fiscal year, ending in September 2012, Apple generated $50 billion in cash flow from operations.
On the market capitalization that equates to a cash yield of $50 billion / $400 billion = 12.5%, which is pretty juicy. When you back out the cash hoard and use the enterprise value instead, it is positively unbelievable -- $50 billion / $274 billion = 18.2%. This is a world-class, growing, innovative company with the balance sheet of all balance sheets, and the free cash flow yield looks like something you might expect from a lumber mill at the peak of a cycle.
Apple's quarterly dividend is currently set at $2.65 per share, or $10.60 per year. At the current stock price that is $10.60 / $404 = 2.6%. That isn't too shabby in a world where a savings account provides you basically nothing but exposure to inflation.
What makes this nice dividend even more appealing is that fact that a $10.60 per share dividend for Apple means an annual cash disbursement of just under $10 billion, or only about 20% of the most recent year's cash flow. That payout ratio doesn't really do how secure this dividend really is justice, however, because we also need to factor in Apple's balance sheet. With $130 billion of net cash on hand, Apple could pay this dividend for 13 years without having to draw on any cash flow being generated by the business.
As a dividend investor, Apple looks great from every angle:
- The dividend is a small amount of annual cash flow, and the balance sheet could fund the dividend for more than a decade. In other words, this dividend is incredibly secure.
- Is dividend growth likely? I think it clearly is as that big cash hoard has to get deployed to the benefit of shareholders.
- And the valuation is very interesting, with a cash flow yield of over 18% for a world-class business.
I still think the future of Apple is tough to predict, and that continuing to generate cash flow at current levels (never mind growing it) has to be challenging. However, as part of a diversified dividend portfolio Apple is a no-brainer at this price. That dividend is going to be around for a long time.
Note: Apple financial figures taken from SEC filings.