Recently I made the decision to sell most of my position in Apple (AAPL). There were a few reasons for this which I will detail below.
Before I begin, let me reinforce that Apple is a fantastic company with solid fundamentals, a wide-moat, huge cash position on the balance sheet, and great management. I love the company and use many of their products. In fact, I am writing this on my Mac and am using my iPhone to check some stats. I think I have at least 7 Apple devices in my home, and probably more.
But…this post is not about the company itself, it is why Apple may not be the darling that some dividend growth investors portray it to be.
Let me explain my rationale for selling most of my shares:
- Valuation:
Even a great company can be a bad investment at the wrong price. While Apple shares have had a great total return over the past few years, the fundamentals do not match the current valuation. Buying (or holding) a company at extreme valuations adds additional risk to your portfolio.
Some recent valuation metrics are as follows:
- Price to Earnings (P/E) of Apple is 31.99. This is over double the median P/E of the company over the past 13 years. The median P/E for the past 13 years has been 15.65
- Price to Free Cash Flow (P/FCF) – currently at 32.65, median is 13.35
- Price to Sales (P/S) – currently at 8.28, median is 3.54
- Price to Earnings Growth (PEG) – 2.25, median is 0.55
These metrics show that Apple is grossly overpriced. If you think of this as if you were buying the whole business, you are paying a price that you would only break even on your investment based on earnings after 32 years! Similar figures for Free Cash Flow, which is the remaining funds the company has after all required expenses.
2. Dividend and Dividend Growth:
The argument that many dividend growth investors give as to why to hold Apple shares is that while the dividend is small today, it is growing at a fast rate and over time this growth will compensate them for the lower starting yield. Well, I must disagree. Apple’s dividend has only been growing at an average of less than 10% over the past 5 years. A starting yield of 0.50% growing at 10% a year is not sufficient to have a substantial dividend payout later on once an investor is going to use the dividend income.
Additionally, the dividend growth rate appears to be slowing. During the past 12 months, Apple’s average Dividends Per Share Growth Rate was 6.90% per year. During the past 3 years, the average Dividends Per Share Growth Rate was 7.70% per year. The 5 year dividend growth rate is 9.18%. This is clearly moving in the wrong direction. There are plenty of other great dividend companies with a higher starting yield and higher dividend growth than Apple. Some examples are AMT, ABBV, and AVGO to name a few. These companies will provide a higher yield on cost later down the line and will provide significantly more income in the future than Apple.
Dividend growth and yield on cost are two very crucial items for dividend growth investors. In Apple’s case, the yield on cost in 20 years if the company continues to provide similar growth of the dividend will only be 2.90%. That is right, after 20 years you will only have a simple yield on cost of under 3%. There are many other quality companies that pay 3% now. Why wait?
Here is an example of the yield on cost of Apple compared to hypothetical yield/growth combinations. You can quickly multiply your future yield on cost by looking at other investments with a higher yield / growth combo.
| AAPL | Examples | |||||
| Starting Yield | 0.50% | 1.00% | 2.00% | 3.00% | 4.00% | 5.00% |
| Dividend Growth (5 year average) | 9.18% | 11.00% | 10.00% | 9.00% | 8.00% | 7.00% |
| Simple Yield on Cost – Year 1 | 0.55% | 1.11% | 2.20% | 3.27% | 4.32% | 5.35% |
| 2 | 0.60% | 1.23% | 2.42% | 3.56% | 4.67% | 5.72% |
| 3 | 0.65% | 1.37% | 2.66% | 3.89% | 5.04% | 6.13% |
| 4 | 0.71% | 1.52% | 2.93% | 4.23% | 5.44% | 6.55% |
| 5 | 0.78% | 1.69% | 3.22% | 4.62% | 5.88% | 7.01% |
| 6 | 0.85% | 1.87% | 3.54% | 5.03% | 6.35% | 7.50% |
| 7 | 0.92% | 2.08% | 3.90% | 5.48% | 6.86% | 8.03% |
| 8 | 1.01% | 2.30% | 4.29% | 5.98% | 7.40% | 8.59% |
| 9 | 1.10% | 2.56% | 4.72% | 6.52% | 8.00% | 9.19% |
| 10 | 1.20% | 2.84% | 5.19% | 7.10% | 8.64% | 9.84% |
| 11 | 1.31% | 3.15% | 5.71% | 7.74% | 9.33% | 10.52% |
| 12 | 1.43% | 3.50% | 6.28% | 8.44% | 10.07% | 11.26% |
| 13 | 1.57% | 3.88% | 6.90% | 9.20% | 10.88% | 12.05% |
| 14 | 1.71% | 4.31% | 7.59% | 10.03% | 11.75% | 12.89% |
| 15 | 1.87% | 4.78% | 8.35% | 10.93% | 12.69% | 13.80% |
| 16 | 2.04% | 5.31% | 9.19% | 11.91% | 13.70% | 14.76% |
| 17 | 2.23% | 5.90% | 10.11% | 12.98% | 14.80% | 15.79% |
| 18 | 2.43% | 6.54% | 11.12% | 14.15% | 15.98% | 16.90% |
| 19 | 2.65% | 7.26% | 12.23% | 15.42% | 17.26% | 18.08% |
| 20 | 2.90% | 8.06% | 13.45% | 16.81% | 18.64% | 19.35% |
Conclusion
Apple shares have done extremely well in the past, with the share price rising significantly. Total return (share price appreciation and dividends) is important, but as a dividend investor, we are looking for future income. Higher stock values do not provide higher incomes. There are other investments that can provide higher income while still achieving substantial share price appreciation. I feel that Apple may not be the best stock to do this. A lower valuation or a higher dividend growth rate would potentially change my mind, but given the current combination of significant overvaluation and low dividend growth, I have decided to mostly sit out on Apple and reallocate that money to other investments that will give me a higher income later in my investment journey.
My timeline does not give me the luxury of a low yield on cost and even after 20+ years it will still not make a significant contribution to my income if the current situation remains. Some people will say to keep Apple and let the capital appreciation happen and then sell the shares and invest in some other dividend stock 20 years from now or whenever I need the money but the problem with that is 1) taxes and 2) I would miss out on compounding and dividend growth of the other alternative investment during that time.