Apple: Love The Small Dividend Hike

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About: Apple Inc. (AAPL)
by: Stone Fox Capital
Summary

Apple made a small dividend hike with the annual announcement along with FQ2 results.

The move was a brilliant way to shift capital return focus back to more valuable stock buybacks.

The tech giant is positioned to smash FY20 EPS estimates based solely on stock buybacks.

The stock trades at an EV of only 12x FY20 EPS estimates of $14.

Apple (AAPL) might face a lot of headwinds in the current economy, but the company is perfectly positioned for weaker stock prices. The tech giant chose to make a minimal dividend hike this year in order to continue focusing on stock buybacks in a perfect move to highlight the minimal impact of dividends on the total return of the stock.

Apple Watch Image Source: Apple website

Small Hike

Along with FQ2 results each year, Apple announces capital return plans for the next year. This year, the company surprised the market by cutting back on the annual dividend hike.

The quarterly dividend for the next year was boosted to $0.77, up or $0.04 or ~5%. The below chart captures how the hike this year didn't keep up with the trend of higher annual hikes.

Chart Data by YCharts

The annual dividend hikes of the last 5 years were all over 7% with at least a 10% hike each year beginning in 2015. My projection for the 2019 hike was a similar $0.10 increase as last year for a new quarterly dividend of $0.83.

Apple doesn't lack cash, nor does the company have a large dividend yield, so the minimal hike was surprising. As the below chart highlights, the dividend yield has rarely held above even 2%. The price chart shows no consistency in relation to the dividend with massive gains generated over the last decade.

Chart Data by YCharts

All About Buybacks

One big reason to favor stock buybacks as the capital return avenue of choice over dividends is the volatility of the stock. Apple dipped from over $230 last year to a low of $142 by December as evidence of how having more dry powder to repurchase shares is beneficial.

In addition, Apple faces all types of threats to the business model from consumer lawsuits over App Store charges to high tariffs on Chinese goods that will make the stock swing wildly. The best way to counter the volatility of the stock is to use the weakness to reward shareholders via reduced share counts and higher ownership positions.

Apple ended March with $113 billion in net cash after executing $24 billion in share buybacks in the last quarter. In comparison, the company only spent $3.4 billion on dividend payouts.

Source: Apple capital returns

The total dividend payouts are even less meaningful, considering the share repurchases. The company spent $3.4 billion on dividend payouts in FQ3'17, and despite the annual hikes, the payout level was still the same nearly two years later. Heck, the company topped $3.0 billion in quarterly payouts all the way back in FQ1'16.

At the same time as announcing an annual dividend payout of nearly $15 billion, the tech giant announced an additional $75 billion authorized for share buybacks. The preference is clearly to repurchase shares, and nobody can blame the company with a stock trading at 15x forward EPS estimates of $12.78 for FY20.

Chart Data by YCharts

The deal gets even better with the cash balance of $113 billion or $24 per share with 4.7 billion shares outstanding. The stock only trades at 13x the EV, so buying shares is logical at these levels.

A prime reason to focus on boosting EPS via reducing the share count is the history of the stock (and most stocks, in general) trading based on the EPS trend of the related company. Apple has generally traded up with the long-term trend of EPS growth. The stock saw weakness in prior periods where earnings took a dip.

Chart Data by YCharts

Absent issues with 25% tariffs placed on goods from China, analysts forecast Apple growing earnings by 11% in FY20. The $1.29 boost in the EPS to $12.78 is only slightly above the annual projection for share reductions in the 6-8% range.

Analysts project FY20 sales to rebound to record levels of $270 billion, topping FY18 levels of $266 billion. The question here is why EPS estimates are only up about $0.87 from the $11.91 earned back in FY18 when the company could repurchase up to 15% of the outstanding shares over the two-year period.

The share count reductions alone on a similar net income of $59.5 billion from FY18 would boost the EPS to $14.00 via a share reduction from 5.0 billion shares to 4.25 billion shares outstanding. My projection for higher margins on higher revenues would provide further boosts to the EPS number over this period.

Takeaway

The key investor takeaway is that the small dividend hike is a brilliant move to focus capital returns on stock buybacks. The stock is headed for a volatile period due to antitrust lawsuit threats over the App Store and potential tariffs on goods from China, making more stock buybacks an ideal way to reward shareholders in the process.

The end result of large stock buybacks is a higher EPS that will drive the stock price higher. The dividend still hardly matters to the returns of Apple.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.