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Apple Inc (AAPL) reported a 4.3% dividend hike for the 11th year in a row on May 4 along with solid earnings and operating cash flow numbers. The company also raised its share buyback program from $76 billion to $90 billion. These actions make AAPL stock attractive to value buyers. Moreover, investors can pick up extra income by shorting out-of-the-money put options.
We predicted last month in our April 2 article that Apple would likely hike its dividend given its massive operating cash flow. For example, in Q1 it produced $28.6 billion in operating cash flow and spent just $3.7 billion on dividend payments. This is comparable to the $3.8 billion it spent last quarter on dividends.
As a result, the annual dividend is now set at 96 cents annually (24 cents per quarter), which gives AAPL stock shareholders a dividend yield of 0.54% at the May 5 closing price of $173.57.
Notice two things. First, this yield is not that high. The reason is Apple prefers to spend most of its cash flow returning cash to shareholders through share buybacks. More on that below.
Second, the dividend cost in Q1 was slightly lower at $3.7 billion, vs $3.8 billion in Q4, even though the same per share dividend (23 cents) was paid. That is because the share buybacks reduced the total cost outlay as there were fewer shares outstanding. That allows the company to raise the dividend per share amount higher than it might do otherwise.
Buybacks Impress Investors
Apple said it will now spend $90 billion on stock buybacks. Compare that to last quarter's $19.1 billion spent on share repurchases or an annual rate of $76.4 billion. This implies a 17.8% increase in its share buyback program.
In addition, this shows that the company wants to spend even more of its operating cash flow on buybacks. For example, in Q1 Apple produced a strong operating cash flow of $28.6 billion while returning over $23 billion to shareholders during the quarter according to Luca Maestri, Apple’s CFO. That means that 66.8% of the cash flow (i.e., $19.1b / $28.6b) will be used on buybacks.
So, if it increases the buybacks to $22.5 billion on average per quarter (i.e., $90b/4), this implies 78.7% of cash flow will go to share repurchases. On the other hand, it may also imply that the company expects its operating cash flow will rise by 17.8% over the next year - i.e., leaving the outlay on buybacks at 66.8%.
Moreover, this means that Apple's $90 billion in repurchases provide shareholders a 3.3% buyback yield. This is because its $90 billion in buybacks represent 3.3% of its $2.73 trillion market capitalization.
Either way, this means that shareholders cash expect higher cash flow, and/or buybacks over the next year. This is very bullish for AAPL stock, despite any concerns there might be over its valuation level.
Shorting OTM Puts for Income Plays
Last month in our article on AAPL stock we discussed shorting $147 strike puts for the period ending April 28. This strike price was over 10.8% below the spot price and well out-of-the-money (OTM). As the put premiums were 70 cents, this provided a 0.48% income yield, based on the strike price for investors who shorted these puts.
Obviously, these puts expired worthless, so the OTM short-put investors kept all of this yield. Moreover, if this trade is repeated each month for a year, investors can make an annualized return of 5.7%.
Today, despite the rise in AAPL stock, investors can still short OTM puts with similar yields. For example, the June 2 expiration option chain shows that the $160 strike price has put option premiums at 73 cents. This strike price is 7.8% away from the spot price and provides good downside protection for short-put investors.
As a result, an investor who secures $16,000 with a brokerage firm, can then enter an order to “Sell to Open” 1 put contract at $160.00. The account will immediately receive $73.00. This shows that the investor immediately makes 0.45% from their investment of $16,000. On an annualized basis, this works out to a 5.5% annualized return.
Moreover, as you can see in the option chain above, you can see the $165 strike price offers a $1.34 premium. This provides an OTM premium-to-strike yield of 0.81% or an annualized rate of 9.7%.
For these reasons, investors are now able to make good money investing in AAPL stock. This is from its 0.5% dividend yield, as well as from shorting OTM puts which have a 5.7% to 9.7% annualized return potential. On top of this, Apple's buyback yield of 3.33% provides investors additional reasons to hang on to AAPL stock for the long term.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
