Protected Principal Retirement Strategy: Will Apple Ever Become A Dividend Portfolio Candidate?

Jul.16.13 | About: Apple Inc. (AAPL)

I have never owned Apple (NASDAQ:AAPL) stock. Like everyone else I do watch it and try to keep up with earnings, dividend announcements and the products, which I use.

This week I was thinking about what (in my mind) it would take for me to consider AAPL as a candidate for the Protected Principal Retirement Strategy portfolio. Admittedly, this is a bit of a stretch, but I guess it could happen, particularly since AAPL currently has about $41/share in cash.

In this article I am (using AAPL's financial metrics and my own assumptions) going to provide analytical information as to where I see AAPL's stock price headed over the next several quarters, metrics relating to the feasibility of future dividend increases, a fundamental rationale for price changes to the underlying stock value, and finally quantitative data depicting at what point AAPL would be an attractive candidate for inclusion in our portfolio.

Current Apple Metrics

As of the market close on Friday July 12, AAPL's price was $426.51, it is paying $12.20 in dividends annually and offers investors a current yield of 2.86 percent.

Apple's present payout ratio is only 19 percent, and it has zero debt. If one couples this with AAPL's $41.70 in cash per share of common stock, it is easy to see that there is plenty of room for a dividend increase. If fact, there is room for several large dividend increases if management is so inclined.

AAPL has only recently (August 2012) begun paying a significant quarterly dividend. The August 2012 dividend was $2.65, and it has recently been increased by just over 15 percent to its present level of $3.05.

According to Yahoo Finance, AAPL's five year forward growth compound annual growth rate [CAGR] is about 21 percent.

With a present book value of $144 per share, its price/book value (P/BV) is 2.96. For a value stock I look for a P/BV ratio below 2.0. According to Yahoo, the forward price/earnings ratio for AAPL is 9.8. The analyst's earnings estimates for AAPL in 2013 average $39.52, a decline of 18 percent year-over-year. The June 2013 earnings estimate is for $7.34 versus $9.32 for the same quarter in 2012. This equates to a decline of just over 21 percent.

Apple's Present Fair Market Value

Based upon analyst's forecasts and my personal opinion I believe that AAPL's present fair market value is around $387/share. I arrived at this by taking the projected earnings of $39.92 and multiplying it by the forward P/E ratio of 9.8. This is only my estimate, so it might not agree with that of other SA readers. I am not asking for agreement.

I have felt for the past several months that, at best AAPL is dead money, and that there is the potential for the stock to take at least another 100 point hit, should the market begin to crater.

What Will It Take For AAPL To Become Attractive As A Dividend Play

With a current yield of less than three percent I would not consider AAPL as a potential position in the Protected Principal Retirement Strategy portfolio. As many SA readers are aware, I prefer stocks yielding in the seven to eight percent range as portfolio candidates. In my opinion, this is not going to happen with AAPL. However, there are a number of scenarios that could lead to AAPL attaining a yield in the neighborhood of six percent - not unattractive if you factor in the potential total return.

It will take one, or more of the following events for AAPL's yield to approach the six percent level:

  • A significant drop in the share price
  • A significant increase in the annual dividend
  • Both of the above

I believe that the highest scenario likelihood is that both a drop in the share price and dividend increases will occur, and that eventually, AAPL's yield could reach the six percent level.

A Drop In Share Price

I have already mentioned that, in my opinion AAPL is presently dead money, and that should the market reverse the stock price could easily be trimmed by another $100/share.

What could justify a $100/share price decline? Aside from the markets tanking, a decrease in AAPL's earnings from the 2013 estimates of $39.52 to a level of $33.26, coupled with a forward P/E of 9.8 would do it. While I don't think this specific scenario will occur, a smaller decline in earnings, coupled with a market correction could certainly have a similar result. In fact, depending upon the severity of a market correction, one can make the case for AAPL falling below the $300 level.

An Increase In The Annual Dividend

I do believe that a significant increase in the quarterly dividend could definitely be in the cards for AAPL. Should the stock continue to be dead money, AAPL's management could easily stimulate investor interest by continuing to increase the dividend.

Assuming that AAPL continues to increase the quarterly dividend by 15.1 percent again in August and November, the quarterly dividend by end of 2013 would be around $4.05. It would not be a stretch to see even greater quarterly increases going forward since the payout ratio is below 20 percent.

A Drop In Share Price And A Dividend Increase

I believe this could be the most realistic scenario (my opinion only). If we were to assume that the combination of lower earnings and a market correction could reduce the stock price by at least $100 (as some speculate), and if management were to bump the dividend to support the stock price, I believe we might see a yield approaching the six percent level by early 2014.

Let's assume that the stock price drops to the $300 level, and management decides to maintain the 15.1 percent quarterly dividend increase. Within the next three quarters the quarterly dividend would be about $4.65 (or $18.60 annually). At a price of $300, AAPL's yield would then be 6.2 percent.

I believe that should (If) such a scenario occur (occurred), many dividend investors would take a much closer look at its income generation potential.

Summary

This is no more than an example of what I believe could possibly take place with AAPL stock providing that market circumstances result in further declines in the stock price and management sustains its current practice of increasing quarterly dividends.

As I mentioned in the introduction of this article I do not own AAPL stock as part of the Protected Principal Retirement Strategy portfolio. However, should such a scenario materialize, I would certainly take a long, hard look at it from a standpoint of both income generation and total return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the stocks discussed.