Apple Inc. (NASDAQ:AAPL) Might Increase Its Dividend in 2020
Apple Inc. (NASDAQ:AAPL) is one of the most-followed stocks in the market today. According to Forbes, the company has an unmatched brand value among all corporations in the world and its products, as we all know, are of high quality. The launch of the first-ever iPhone in 2007 marked the beginning of a new growth phase for Apple, and the company has never looked back. Despite the mature nature of the company, Apple continued to grow in size over the last five years, supported by the increasing popularity of its wearables such as AirPods and the Apple Watch. This led to a stellar performance of its shares.
nvestors do not expect growth companies to distribute the bulk of their earnings as the funds are better allocated to investments that could earn higher yields in the future. However, the case with Apple is different. The company is still pursuing growth opportunities, but the massive net cash position is something the company executives have been worrying about for the last couple of years. Apple brings in billions of dollars in free cash flow every year, which played a major role in the dividend growth over the last seven years and the massive growth in share buybacks. Going forward, the company might choose dividends over repurchasing shares for several reasons.
Apple’s view for its massive cash balance
In February of 2018, Luca Maestri, the chief financial officer of Apple, emphasized his goal of bringing the net cash position to zero over time:
“Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is $163 billion and given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral over time. We will provide an update to our specific capital allocation plans when we report results for our second fiscal quarter, consistent with the timing of updates that we had provided in the past.”
Net cash is a term used to refer to additional liquidity on top of the total debt of the company. Therefore, a net cash neutral position would mean the company holds on to a cash balance that is approximately equivalent to the amount of debt on its balance sheet.
For any company, there are three primary ways to expend cash.
- Distribute to shareholders via dividends.
- Buy back its own stock.
- Acquire a target company in hopes of realizing revenue or cost synergies.
For Apple, the third option seems very unlikely due to the significant regulatory pressure the company would have to face because of its massive scale. As a result, Apple has chosen to use both buybacks and dividends to achieve this objective.
According to data from company filings, Apple had $98 billion in net cash at the end of September and will likely choose either dividends or buybacks to bring this to zero in the future. Even though the latter has been preferred by the management in the past (which is exhibited in the above graph), it looks as if 2020 will be a good one for dividend investors.
Valuation is tricky – a reason for Apple to consider alternative options to distribute wealth
Analysts, economists and investors have long debated about the true value of share buybacks. Apple has so far been able to create shareholder value through its repurchases. For instance, the company reported a net income decline of 7% in 2019 in comparison to the previous fiscal year, but earnings per share contracted only 0.37% as Apple retired approximately 6% of its share count in the last 12 months. If not for this, the company would have reported a mid-single-digit decrease in earnings per share, which could have caused the stock to tumble.
Even though Apple has diversified its revenue streams over the last several years, the company still relies on the iPhone segment to drive growth. For example, according to the latest annual report published in October 2019, iPhone sales accounted for 54.7% of total revenue. Therefore, the expected slowdown in unit sales in the future will have an impact on company earnings, and the current valuation multiples do not reflect this risk.
Apple’s management, who are fully aware of this situation, might take a step back in 2020 and reduce the funds allocated to share buybacks as the stock can no longer be categorized as undervalued. In such a scenario, Apple would have to hike dividends to meet the net-cash neutral objective.
The power of buybacks are declining; another reason for Apple to think about hiking dividends
From the perspective of investors, the more shares a company can retire through its buyback program – the better. The higher the percentage of shares taken off the market, the better the earnings per share and other per-share figures would look. The below table summarizes the effectiveness of repurchases at different share price levels, assuming buybacks totaling $20 billion.
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 278.97.
The projected upper bound is: 320.13.
The projected lower bound is: 303.21.
The projected closing price is: 311.67.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 7 white candles and 3 black candles for a net of 4 white candles. During the past 50 bars, there have been 34 white candles and 16 black candles for a net of 18 white candles.
A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 91.0937. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a sell 13 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 82.71. This is where it usually tops. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 30 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 141.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 13 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 18 period(s) ago.
Rex Takasugi – TD Profile
APPLE INC closed up 0.700 at 310.330. Volume was 30% above average (neutral) and Bollinger Bands were 75% wider than normal.
Open High Low Close Volume___
310.600 312.670 308.250 310.330 35,217,272
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 299.41 273.37 223.14
Volatility: 19 20 28
Volume: 33,689,800 27,054,250 27,097,310
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
APPLE INC is currently 39.1% above its 200-period moving average and is in an upward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect moderate flows of volume into AAPL.O (mildly bullish). Our trend forecasting oscillators are currently bullish on AAPL.O and have had this outlook for the last 99 periods. Our momentum oscillator is currently indicating that AAPL.O is currently in an overbought condition. The security price has set a new 14-period high while our momentum oscillator has not. This is a bearish divergence.
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