Once the Street’s hottest growth stories, Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL) are now undeniably dividend stocks. But which tech giant offers dividend investors better prospects? Given Microsoft’s recent decision to boost its dividend by 22%, as well as Apple’s price change, dropping from $500 to about $460 since the company launched its new iPhones, the dividend battle between the two is as heated as ever.
To identify the winner, let’s first see how the two companies face off on key metrics used to analyze dividend stocks.
Dividend yield
Microsoft Corporation (NASDAQ:MSFT)’s move to boost its dividend significantly improves the company’s dividend yield, from 2.8% to 3.4%. Apple Inc. (NASDAQ:AAPL)’s yield trails meaningfully behind at 2.7%.
Payout ratio
Of course, there’s more to dividend stocks than dividend yield. Investors want to ensure that a dividend is sustainable. Analyzing a company’s payout ratio helps an investor gauge a dividend’s durability.
A payout ratio is simply a company’s annualized dividend divided by its annualized earnings. The lower the ratio, the less likely the company will decrease the dividend if earnings take a tumble. Additionally, the lower the payout ratio, the more room the company has to increase the dividend going forward.
Apple Inc. (NASDAQ:AAPL)’s payout ratio, at 28%, is slightly better than Microsoft Corporation (NASDAQ:MSFT)’s, at 36%. But both are impressively low. Consider dividend stalwarts Waste Management and Johnson & Johnson, with payout ratios of 80% and 56%, respectively.
Cash hoard
Apple Inc. (NASDAQ:AAPL) boasts significantly more cash than Microsoft Corporation (NASDAQ:MSFT) — $146 billion compared to Microsoft’s $77 billion. On a per-share basis the playing field is a bit closer: Apple’s cash hoard accounts for about 35% of its share price and Microsoft’s cash accounts for about 28% of its share price. Still, Apple’s cash per share is meaningfully higher than Microsoft’s.
Managing expectations
With both companies scoring closely on basic dividend metrics, we need a tie-breaker, and when you zoom out and take a look at each company’s respective market, the tides seem to be in Apple Inc. (NASDAQ:AAPL)’s favor.
Microsoft Corporation (NASDAQ:MSFT)’s Windows and Business (Microsoft Office) divisions together accounted for 58% of the company’s operating income in its most recent quarter. Both of these divisions are heavily tied to the struggling PC industry. IDC estimates that worldwide PC shipments from the top five vendors declined 11.4% in the second quarter of 2013 compared to the year-ago quarter.
Though Apple may currently be struggling to boost EPS comparisons thanks to lower profit margins and tough sales comparisons, sales could easily pick up again. And IDC’s expectations for tablet and smartphone shipments (two categories that make up 69% of Apple’s business) are far more optimistic than its forecast for PC shipments. IDC estimates a compound annual growth rate of 13.3% for worldwide smartphone shipments between this year and 2017. The research firm is even more bullish when it comes to tablets, forecasting a compound annual growth rate of about 16% for the same period.
Given that Apple and Microsoft are on nearly equal footing when it comes to dividends, I’d rather go with the stock in a growing industry. Even more, with pessimism lurking over Apple’s conservative valuation, any catalyst in Apple’s story could result in significant upside.
Apple is the better dividend stock, and the recent sell-off makes it even tastier.
The article Which Tech Giant Makes a Better Dividend Stock? originally appeared on Fool.com and is written by Daniel Sparks.
Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft.
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