Apple Inc. (NASDAQ:AAPL)‘s 2.3% dividend yield may seem small compared to other solid dividend stocks. But its less-significant payout doesn’t disqualify Apple Inc. (NASDAQ:AAPL) as a potential dividend play. In fact, looking beyond the yield reveals that Apple is potentially one of 2013’s best dividend stocks.
4 dividend stocks
To analyze Apple as a dividend stock, let’s compare it with four other stocks that make frequent appearances on “best dividend stocks” lists.
Solid income investments require three criteria:
1). A meaningful diviend yield.
2). An ability to generate significant free cash flow, or FCF.
3). A relatively low payout ratio.
|Company||Dividend Yield||Payout Ratio||FCF-to-Sales|
|Procter & Gamble (NYSE:PG)||2.9%||57%||12.8%|
|Apple Inc. (NASDAQ:AAPL)||2.3%||12%||28.1%|
The Clorox Company (NYSE:CLX)
The result is a nice 3.1% dividend yield and a conservative payout ratio of 58%. A payout ratio is the fraction of net income a company pays to its shareholders in dividends. The lower the ratio, the less likely it is that the company’s dividend would take a hit if its fundamentals turned awry. A payout ratio of 58%, therefore, leaves room for this cash cow to maintain a solid dividend going forward.
The Procter & Gamble Company (NYSE:PG)
Amid intense competition and a sluggish global economic environment, Procter & Gamble is struggling with slowing revenue and an overextended expansion. But that doesn’t stop the company from throwing off cash. Over the trailing 12 months, the company has generated nearly $0.13 of FCF per dollar of sales. In fact, during the last three years alone, P&G has generated more than $36 billion in free cash flow.
At today’s price, Procter & Gamble’s dividend yields 2.9%. It has a conservative payout ratio of 57%.
The Coca-Cola Company (NYSE:KO)
Diversification, extensive distribution, and powerhouse brands — Coca-Cola has it all. The company’s powerful position as a global leader in consumer beverages results in an extraordinarily consistent ability to produce generous amounts of FCF for shareholders. In fact, over the last 10 years, the company’s FCF-to-sales ratio only dipped below 15% once.
Coca-Cola has a meaningful dividend yield of 2.7% and a conservative payout ratio of 52%.
Apple Inc. (NASDAQ:AAPL)
Apple Inc. (NASDAQ:AAPL)’s products carry significant brand equity, evident in the company’s trailing-12-month gross margin of 42% — the envy of the industry. The result is a FCF-to-sales ratio of 28.1%, far higher than any of the three companies listed above. Though some tech companies like Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) have significant FCF-to-sales ratios as well — 37.8% and 26.6%, respectively — that’s because their revenue comes from software and/or services, which have higher margins. Apple Inc. (NASDAQ:AAPL) stands alone as the world’s most profitable consumer electronics company.
Yes, Apple’s dividend yield of 2.3% is lower than all three of the companies mentioned above. But its extremely conservative payout ratio of just 12%, combined with its ability to throw off cash, means that Apple’s dividend could grow significantly in the future.