As Apple (NASDAQ:AAPL) soars to all-time highs, the big question is whether the yield still supports holding the stock. The dividend yield is down to only 1.6%, but another yield is far more crucial.
The stock of the technology giant recently hit $140 for the first time (not counting prior to the last split). Does Apple really have upside to $175 based on a doubling of the dividend as Pacific Crest suggests?
Apple started an aggressive capital return program back in FY13. The company ended FY12 with $121 billion of cash on the balance sheet. Luckily for us, Apple provides this convenient and detailed breakout of the quarterly/annual payments to shareholders and the related ending cash position.
Source: Apple capital returns slide
The amounts are fascinating to review. Apple has returned $201 billion to shareholders in what mostly encapsulates a little over four years.
Over the years, the quarterly dividend payouts haven't really risen due to the massive stock buybacks. Apple paid out nearly $2.8 billion to shareholders per quarter in FY14 and only paid out $3.1 billion in the last quarter.
On the flip side, the stock buybacks were limping along heading into FY17. Apple only spent $29 billion on buybacks in FY16 after reaching $45 billion back in FY14.
The stock traded weak last year so one had to wonder if the weak stock buybacks weren't a negative sign until the December quarter came around. Apple used an ASR of $6 billion to help boost the quarterly buyback to $11 billion and the stock hasn't looked back this year so far.
Anybody following the net payout yield concept would immediately see some concern with the stock up at $140. The yield that combines the net stock buyback yield and the dividend yield has dropped to the lowest level in nearly four years.
Now at only 6%, Apple is nowhere near the top yields in the market that easily top 10% to start March.
Repatriation Of Cash
This all brings up discussion of the repatriation of cash issue. Over the last year, Apple appears highly reluctant to add to the debt position. The tech giant ended Q216 with $80 billion in debt and has only added to the debt position by $8 billion. During this time period cash has grown by $13 billion.
Remember the mention above that the cash balance ended FY12 at $121 billion. Well the net cash position is now up at $158 billion. Apple has returned over $200 billion to shareholders and the net cash position has grown by $37 billion.
The repatriation of cash would solve the problem of forcing the tech giant to constantly raise debt domestically to use for capital returns. Pac Crest analyst Andy Hargreaves goes so far to suggest that Apple could double the dividend to $4.56 per share.
Such a suggestion is curious as Apple has regularly spent double the dividend payout on buybacks. Maybe a lack of cash on the domestic balance sheet does keep the iPhone maker from dramatically increasing the dividend portion, but the reality is that the shares were far too cheap to focus payouts on dividends.
Over the last year and even prior, Apple has regularly traded close to 10x forward EPS estimates.
Though a doubling of the dividend at the current price would make Apple appealing to dividend only focused investors, the market might question whether such a move is a signal that the stock is no longer a bargain.
If Apple surged to $175 after a dividend hike to $4.56 per share, the stock would only offer a 2.6% dividend yield that probably wouldn't impress investors knowing that a tech giant like Apple has an inherent added risk of losing market share.
The more important issue is what Apple does with the stock buybacks. Loaded with net cash of $158 billion and strong free cash flow generation far in excess of the dividend, what will the company do with repurchasing debt or paying down the debt now that the market value is over $700 billion?
Naturally, the unknown is the tax rate to repatriate cash. As well, China is likely to frown on Apple sending cash back home questioning the long-term strategy in that country. According to Robert Key of Endpoint Technologies Associates:
Apple is annoying to China because it's selling phones and sending money back to the United States. It's competing with Xiaomi and Huawei, and that's an irritant.
China is an incredibly important market for Apple, but one increasingly unlikely to like the company sending cash home to reward American shareholders.
The key investor takeaway is that the net payout yield no longer impresses as Apple has pulled back on capital returns while the stock has risen to record highs. With cash balances growing, the company could've easily spent another $7 billion annually to increase the net payout yield to a very solid 7% so we'll cut Apple some slack on the yield.
With expectations for cash repatriation and iPhone 8 success leading to surging FY18 EPS estimates to over $10 per share, the reason to own the stock up to $175 is due to surging cash flows and related stock buybacks. These are the reasons to hold onto Apple as the net payout yield dips.
Contrary to what analyst Andy Hargreaves suggests, a big dividend hike would suggest the BOD sees the stock fairly valued. In that manner, a doubling or tripling of the dividend would be a sell signal. For now though, the stock has major tailwinds to ride to new all-time highs.
Disclosure: I am/we are long AAPL.
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.
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