Newsletter portfolios holding Apple set multiple company records in the first quarter of its fiscal 2017. Let’s take a quick look at the quarter.
By Kris Rosemann
On January 27, tech giant and newsletter portfolios holding Apple (AAPL) reported the highest quarterly revenue in its history in the first quarter of its fiscal 2017, along with all-time unit and revenue records for the iPhone and Apple Watch, all-time records for its ‘Services’ segment revenue and Mac sales, and all-time revenue records for four of its five geographic segments despite considerable currency headwinds. Such impressive top-line performance across the board helped drive record quarterly earnings per share as well.
We recently increased our fair value estimate for shares of Apple to $159 after reassessing our near-term top-line growth expectations, which we expect to be in the mid-single digit range, suggesting shares are still attractively priced on a discounted cash flow basis. Though its dividend yield is not among the most compelling on the market, the company’s dividend growth potential and dividend safety are among the best in our coverage universe thanks to its fortress-like balance sheet that continues to build with each passing quarter of robust free cash flow generation. All of these qualities are reflected in its astounding Dividend Cushion ratio of 5 at last check. We’re not letting go of shares anytime soon.
Apple’s headliner clearly remains the iPhone, and the most recent quarter saw iPhone demand surpass management’s expectations, a welcome report after a slight blip in sales in fiscal 2016. The Mac was able to buck global PC market trends and return to revenue and unit growth on a year-over-year basis in the quarter ended December 31, albeit slightly, on its way to record quarterly revenue, speaking to Apple’s brand strength. Apple’s leading position in the wearable technology market is further evidence of its combination of brand power and innovative nature, as holiday demand for the Apple Watch, the world’s best-selling smartwatch, surpassed supply.
We continue to point to Apple’s ecosystem as a key competitive advantage beyond the allure of its hardware, and it enables Apple to be ‘with’ consumers at the gym, on the go, in their homes, and at work. The firm is also beginning to gain momentum with enterprise level customers looking to connect mobilized workforces more efficiently. December 2016 was the App Store’s best month ever in terms of purchases, and the company’s ‘Services’ segment is only beginning to gain steam, according to management. It expects the segment to be the size of a Fortune 100 company this year, and its goal is to double the size of the business in the next four years. Apple appears well on its way to achieving that goal, as the number of people transacting on its stores is increasing at a strong double-digit rate in addition to average revenue per paying customer growing at a double-digit pace.
We love what the doubling of the higher-margin ‘Services’ segment would mean for Apple’s overall profitability levels, and the increasingly subscription-based sales model provides additional visibility into the business. The tech giant doesn’t need a boost when it comes to dividend growth potential–free cash flow in the most recent quarter came in at ~$23.7 billion compared to cash dividends paid of ~$3.1 billion–but the characteristics of its expanding ‘Services’ business are some that we associate with top income ideas. Better than company-average margins, low capital intensity, and a predictable and growing revenue stream all play directly into the dividend growth investor’s hand.
Shares of Apple are changing hands at less than 14.4 times fiscal 2017 consensus earnings estimates as of this writing, or just below the lower bound of our fair value range, and we plan to continue to include shares in the newsletter portfolios for the foreseeable future. We may consider making our position in the Dividend Growth Newsletter a full 5% weighting sometime in the near future as we continue to look for uses of our sizeable cash balance in the portfolio. The decision to add to our current position may ultimately rest on how the board handles the potential for a dividend increase this spring, as it has hiked the quarterly payout each spring since 2012. Shares yield ~1.8% as of this writing, a bit light when considering the objectives of the Dividend Growth Newsletter portfolio, but the potential for dividend payments to multiply from current levels and still be covered by free cash flow generation is certainly an enticing proposition, particularly when coupled with Apple’s current valuation profile.