Apple Inc. (NASDAQ:AAPL)
Much like Cisco Apple started its dividend recently, just last year in fact. When Apple paid its first dividend the stock was still on its upward march to $700, and at that price the yield was just 1.5%. But the rapid decline of the stock since that high to around $430 per share has raised the yield to a respectable 2.5%, making the stock much more attractive.
The fall in stock price came as skepticism regarding future growth began to take hold. Android devices were gaining share, offering cheaper alternatives to the iPhone and iPad, and Apple hadn’t offered a revolutionary product in a few years. Now, with hedge fund manager David Einhorn pushing Apple to do something with its enormous pile of cash, investors have gotten extremely impatient with the once darling company.
Apple Inc. (NASDAQ:AAPL) does have a lot of cash – $137 billion or $144 per share. The annual dividend is only $10.60 per share right now, so the cash alone could cover this dividend for over 13 years. Using this projected dividend in 2012 the payout ratio was 24% of both free cash flow and net income.
This is why I’ve chosen Apple for the Ultimate Dividend Growth Portfolio. The potential for dividend increases in the future is enormous. If Apple grows its free cash flow by 6% annually for the next ten years the dividend could be raised by 14% annually during that time for the payout ratio to reach 50% by year ten. According to my table from the previous article a yield of 2.5% requires dividend growth of 11.5% for the stock to be fairly valued, so it looks like Apple should have no problem achieving this.
And with the giant cash hoard the company could purchase enough shares to slow the increase of the payout ratio. Imagine this scenario: the company reduces the share count by 20% over the next 10 years. At today’s prices that would only be $80 billion, which Apple could cover today with its cash and certainly with its cash flows over the next decade. In my previous calculation at the end of 10 years of 14% annual dividend hikes the payout ratio would be just 41.7% if these buybacks are enacted. The dividend would have to be increased by 16% annually to reach a 50% payout by the end of 10 years.
The point I’m trying to make is that the potential for dividend growth here is huge. Based on prices as of this writing I’ll add 12 shares of Apple Inc. (NASDAQ:AAPL) to my Ultimate Dividend Growth Portfolio with a cost basis of $5,157.60. This position will generate a projected annual dividend of $127.20.
The next step
After these four additions The Ultimate Dividend Growth Portfolio now has 8 positions and has used 40% of its cash. Next time I’ll add a few more dividend growth stocks which have exceptional potential and further flesh out this portfolio.
If you want to see what the portfolio looks like and what transactions I’ve made you can go hereto see the current state of the portfolio at any time. This will allow you to follow the portfolio and see changes I’ve made before I write about them.
I’ll leave you with what the portfolio now looks like. See you next time.
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Timothy Green owns shares of Microsoft and Cisco. The Motley Fool recommends Apple Inc. (NASDAQ:AAPL), Cisco Systems, Inc. (NASDAQ:CSCO), and Intel. The Motley Fool owns shares of Apple, Intel, and Microsoft.
