Published December 2nd, 2016 by Bob Ciura
In the realm of dividend investing, a track record means everything.
Here’s why: A long dividend track record proves that a company’s management is both willing and able to reward shareholders with rising dividends.
To be a Dividend Achiever for example, a stock must have raised its dividend for at least 10 years in a row. You can see the entire list of all 273 Dividend Achievers here.
Some stocks fall off these lists or are not included, for good reason.
For instance, some stocks freeze dividends for years on end, or cut their dividends, if their underlying businesses struggle. These are stocks that should be avoided.
That being said, there are many stocks that do not qualify for one of these lists, through no fault of their own. Some, like technology giant Apple, Inc. (AAPL), simply have not had a long enough dividend history.
Apple is not on this list. It only resumed paying a dividend in 2012, after a nearly two-decade hiatus.
But that doesn’t mean Apple is a weak business. It has an incredibly strong competitive advantage – and one of (if not the most) well known brands in the world.
But it could be argued that Apple will surely be a Dividend Achiever — and very likely a Dividend Aristocrat — over time.
For right now, Apple is a compelling choice for investors looking for rising dividend income. It has caught the attention of Mr. Wonderful of shark tank fame. Apple is Kevin O’Leary’s top holding in his quality dividend ETF (OUSA).
Apple is a huge technology company with a wide lineup of products. It manufactures cell phones, laptops, and tablets under the iPhone, Mac, and iPad brands. It also sells other products like Apple TV.
The iPhone is Apple’s most important product. It currently represents 60% of Apple’s revenue. The iPhone was a game-changer for Apple. The innovation of the iPhone allowed Apple to take the lion’s share of profits in the smartphone industry.
Apple does not receive the highest market share in the industry, but it makes up for this with extremely high margins and growth.
Indeed, Apple’s growth of revenue and earnings-per-share over the past five years has been extremely impressive.
Source: 2016 10-K, page 24
Conditions over the past year have soured, however. Now that Apple has finished the iPhone 6 cycle, the company is seeing a modest deterioration. Earnings-per-share fell 10% in fiscal 2016.
Fortunately, Apple recently unveiled a major new product release, the iPhone 7. This should rejuvenate iPhone sales, which is critically important for the company. And, Apple will benefit from its booming services business.
As a result, the company should see more than enough growth to provide shareholders with double-digit dividend growth each year moving forward.
The market continues to trade Apple at a frustratingly-low price-to-earnings ratio of just 13. Compare this with the S&P 500, which trades for a price-to-earnings ratio of 25. Investors seem to doubt Apple’s growth potential, as the company’s results last year were a disappointment.
While Apple did take a step back in fiscal 2016, it is not because of a fundamental deterioration of the business. Instead, the company simply took a ‘breather’ because it did not benefit from a major new iPhone release.
This is an important distinction. Apple is a lot like a baseball player who hits his home runs in “bunches”. Apple produces huge growth when it comes out with new products, and suffers mild declines in the interim years.
Viewing Apple over a two-year frame further explains this dynamic.
Source: 2016 10-K, page 26
Apple suffered declining revenue across its three biggest geographic segment, but there is more to this story than meets the eye. The company simply suffered from very difficult comparisons, given the huge growth rates seen in fiscal 2015 due to the iPhone 6 release.
Apple management understands that with inconsistent growth rates, the stock is likely to retain a below-average price-to-earnings ratio. In response, the company is planning more regular updates to its product line. The hope is that this will create a smoother revenue stream.
One way it plans to do this is by investing in its services business. Apple’s services platform, which includes the App Store, iTunes, iCloud, Apple Pay, and Apple Care.
Source: 2016 10-K, page 28
Services are growing at a high level. Growth is accelerating, as consumers are using services at an increasing rate. For example, last quarter services revenue increased 24% year over year, to $6.3 billion. This was a record quarterly performance for the services business.
Apple will also realize growth from new geographic markets. The company continues to grow in China, and will look to India for future growth. Apple has only about a 3% market share in India.
Apple’s lower-priced iPhone SE should compete well in the India market, where consumers typically purchase lower-priced devices.
It is not an exaggeration to say that Apple has one of the securest dividends in the entire market. The company has a highly profitable business model with several competitive advantages. Famous quality/value investor Warren Buffett bought into Apple in 2016, despite his long standing aversion to technology businesses.
In addition, Apple has a pristine balance sheet. It has a mountain of cash, with a modest debt position. Apple ended last quarter with $237 billion of cash, marketable securities, and long-term investments. This dwarfs its $75 billion in long-term debt.
Lastly, Apple’s dividend takes up only a small portion of its earnings-per-share. Apple currently distributes $2.28 per share in annual dividends. This represents 27% of Apple’s fiscal 2016 earnings-per-share.
Its extremely low payout ratio leaves plenty of room for many years of dividend growth up ahead.
The Dividend Aristocrats and Dividend Achievers lists are a great place to look for investors interested in dividend growth stocks. But it shouldn’t be the only place you look.
Investors may be limiting themselves by only considering stocks that already qualify for these lists. By doing so, an investor may make the mistake of missing the next Dividend Achievers or Dividend Aristocrats.
Apple has a 2% dividend yield and is not yet a Dividend Achiever. This seems fairly unimpressive at first glance. But Apple has indicated plans to increase its dividend by at least 10% per year going forward.
The company certainly has the fundamental strength to become a Dividend Achiever, and possibly a Dividend Aristocrat, in time.