Situation At Apple Might Be Similar To Microsoft At The Turn Of The Century

| About: Apple Inc. (AAPL)

Summary

Will headwinds impede shareholder returns?

Is the stock appropriate for a dividend growth portfolio?

The answers may surprise you.

It was ugly. The January earnings announcement didn't provide good news for investors or fans of Apple (NASDAQ:AAPL). There is probably no need to repeat the information. Plenty of articles were written, which generated hundreds of comments.

But there is one aspect of the discussion that seems to get short shrift here on SA. I'd like to expand on it and provide an example from another era that might enlighten (and enliven) Apple investors who have been beaten down in recent months.

Capital Return

Shareholders can still benefit from the ongoing capital return program while the growth (or non-growth as the case may be) story is sorted out over the near term. According to Apple, $47B of the original $200B authorization is still unspent.

In 2012, AAPL reinstated its dividend and later started buying back loads of its own stock. The quarterly payouts have increased at double-digit annual rates, and the share count has been reduced by about a billion shares.

Despite comprising about only 4% of my own portfolio, the dividend provides more than 20% of the total income generated. Factoring in debt repayments, the capital return results in an 8% shareholder yield, which, in the absence of future growth, is the minimum that investors such as myself should expect all other things being equal.

Apple also possesses the "mother of all balance sheets", including $216B in cash on hand and a AA- credit rating. It could afford to buy outright many of its S&P 500 (NYSEARCA:SPY) brethren and still have a few billion left over for pocket change. In theory, a company with this much money to burn would be a no-brainer for a dividend growth portfolio. However, in light of the recent events, should a retired investor needing to supplement a pension and Social Security payments even want to hold Apple?

Criteria

I have written quite a bit about how to construct and manage an optimal dividend growth portfolio. You can read articles such as "My Rules for Creating an Optimal Dividend Growth Portfolio" and "Beyond The Basics: Managing A Dividend Growth Portfolio".

The consideration includes reviewing a set of numerical criteria such as valuation, earnings and dividend growth rates and history, dividend yield, payout ratio, and long-term debt compared to shareholder equity. Intangibles such as current sentiment, recent news, and industry and company outlooks also come into play when making the decision.

Looking just at the metrics, Apple would fall short in two of the categories: dividend history and yield.

It has been paying a dividend only for a few years now after reinstating it following a long hiatus. The current dividend yield of about 2% is relatively low when compared to alternatives such as the 10-year Treasury note and other stocks.

The intangibles are harder to assess. Are Apple's best days behind it? Has it lost its innovative spark? Has management gone from a tech/product focus to one of financial engineering?

Your guess is as good as mine. However, the situation at Apple has parallels with that of another technology company, which has become sort of a stealth dividend growth darling. I see no reason Apple couldn't do the same.

Mr. Softy

Microsoft (NASDAQ:MSFT) was on top of the world two decades ago, much like Apple is today. Flush with cash and supplying wildly popular products and services the company sported a market capitalization of over $600B ($854B in today's currency) at the end of 1999. It had a huge advantage in PC operating system software and office productivity tools at the time, much like Apple has today over its competition in the high-end smartphone industry.

Mr. Softy dropped its lofty perch, but still ranks third on the list behind Apple and Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) with a market cap of $416B today.

As PC use was supplanted by mobile computing over the last decade, Microsoft's go-go growth slowed down, but it didn't stop the company from becoming a dividend and buyback dynamo, returning lots of value to shareholders over the years. Presently the stock yields 2.76%. The $1.44 dividend has been growing at a 18% annual clip over the past five years. These numbers rival anything that long-term dividend growers such as Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO) have been doing for decades.

Microsoft has learned to adapt by branching out into new growth areas such as the cloud and mobile, even competing against Apple in the tablet market with its Surface lineup. New CEO Satya Nadella appears to have the company pointed in the right direction.

Apple Dividend Dynamics

Armed with innovation-themed design, engineering, and manufacturing operations second to none, annual free cash flow approaching $80B, a payout ratio of only 20%, and long-term debt well below shareholder equity, Apple can probably afford to keep paying and increasing the dividend, and buying back more shares, even in the face of the many headwinds it is facing right now.

Like Microsoft did in the last decade, going forward Apple, because of its "think different" culture, has the unique ability to deal with the current issues and continuously improve and adapt to economic troubles and changing technology and consumer habits.

Conclusion

Although it might fall short in a couple of numerical categories, and even with the myriad, albeit short term, problems it needs to deal with, Apple still might be a worthy dividend growth stock in the mold of fellow tech giant Microsoft, and stalwarts Johnson & Johnson and Coke.

Disclosure: I am/we are long AAPL, JNJ, KO.

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.