Apple Inc is likely to become the future dividend aristocrat.

Apple Inc shares are down 11% so far this year, and investors are grappling with a series of headwinds, such as inflation, rising interest rates and the war in Ukraine, which have not been seen in decades.

Those who focus only on the short term may miss an important detail of the company: Apple Inc has one of the safest dividends in the technology industry and perhaps even in the market as a whole.

Apple Inc's business generates huge profits and free cash flow, supporting growing dividends. Such companies should be the mainstay of the portfolio of dividend growth investors.

This article will examine the company to see why I believe Apple Inc is the future dividend aristocrat, although it is still more than a decade away from the dividend growth years needed to enter this exclusive group.

Company background and performance history

Apple Inc started as a computer company, but now it has developed into a leading supplier of all kinds of personal technology equipment. The $2.6 trillion company generated $378 billion in revenue last year.

In an industry full of revolutionary companies, Apple Inc has always been one of the most successful names in history. The company's product portfolio includes iPhone, Mac, iPad, iPod, Apple Inc watches and Apple Inc TV.

Apple Inc has a service business that sells apps, music and subscriptions. In addition, the company provides consumers with a way to complete financial transactions through its Apple Inc payment digital wallet service.

Once relying on personal computers for income, customers can use a wide variety of Apple Inc products to create a complete ecosystem for themselves. The company's products are largely regarded as industry leaders. Because they can be connected to each other, they can be used together to enhance the user experience.

Apple Inc's product lineup makes it one of the most successful companies in history. The performance of the top and bottom lines reflects this success.

Over the past 10 fiscal years, revenue has grown at a compound annual rate of nearly 10% (the company's fiscal year ends on the last Saturday in September).

During this period, earnings per share grew at a compound annual rate of 15.1%, as Apple Inc significantly reduced the number of its shares over the years. Over the past decade, the company has bought back nearly 5% of its shares every year.

Since fiscal year 2012, net profit has continued to grow at an annual rate of 9.5 per cent. Profit margins have remained largely stable over the past decade, so net profit growth is driven by higher sales.

While the long-term data are strong, it is recent results that should excite investors. Over the past five years alone, revenue has grown at a compound annual rate of 12.4%. Earnings per share have also grown by 25% a year over the past five years, thanks in part to share buybacks. Net profit grew by more than 18 per cent a year, and net profit margin increased by 480 basis points to 25.9 per cent.

Despite Apple Inc's long-term success, it has indeed made great progress in the past few years, with accelerated growth in revenue, earnings per share and net income. The company is just selling more products and drawing more profits from the business.

Companies that have been in a long-term growth model usually don't see fundamental acceleration. When starting from a high base, it becomes more and more difficult to maintain high growth rates.

Apple Inc is one of the few companies that have succeeded in achieving this goal and will pay more and more dividends.

Recession performance and dividend growth history

Growth companies in the technology industry tend to perform poorly in a recession, but the previous section showed that Apple Inc is different from most companies.

Adjusted according to the stock split, Apple Inc's adjusted earnings per share before, during and after the Great Recession are as follows:

Adjusted earnings per share in 2006: 8 cents

2007 adjusted earnings per share: 14 cents (up 75%)

Adjusted earnings per share in 2008: 19 cents (up 35.7%)

2009 adjusted earnings per share: 22 cents (up 15.8%)

Adjusted earnings per share for 2010: 54 cents (up 145.5%)

Adjusted earnings per share in 2011: 99 cents (up 83.3%)

2012 adjusted earnings per share: $1.58 (up 59.6%)

Apple Inc's earnings grew by more than 57 per cent between 2007 and 2009. Some may point out that the slowdown in growth is a bad sign for the company over time, but Apple Inc returned to high-growth mode immediately after seeing the recession in the rearview mirror. What makes this growth all the more impressive is that it was largely achieved without share buybacks, as the company maintained a stable number of shares until 2013.

For recent examples of the company's performance under adverse conditions, please consider the COVID-19 epidemic. Fiscal year 2020 covered most of the worst cases of the epidemic, with Apple Inc's income, net income and earnings per share rising 5.5 per cent, 3.9 per cent and 10.4 per cent, respectively. It is true that business has slowed, but more importantly, there has been growth even in a highly challenging period. In the second year, as business rebounded very well from the previous year, revenue, net income and earnings per share increased by 33.3%, 64.9% and 71%, respectively.

Apple Inc did not pay a dividend during the last recession, but paid it for the first time in 2012. The company has kept it for nine years in a row. Dividends have more than doubled since 2013, with a compound annual growth rate of 9.5 per cent over the period. The five-year CAGR is 9%, showing investors that the company's dividend growth over the two periods is quite consistent. The company's latest growth last year was 7.3 per cent, still close to its long-term average.

Coupled with a large number of share buybacks, Apple Inc has always been a very friendly shareholder company.

The influence of dividend yield and debt on Future dividend growth

Apple Inc's business is a production machine for profit and free cash flow. That's why buybacks and dividends have increased so much over the years.

In fiscal year 2021, Apple Inc paid a dividend of 85 cents per share and generated earnings of $5.61 per share at a dividend yield of 15 per cent. Investors should see a dividend of at least 88 cents a share this year. Analysts expect the company to earn $6.17 a share and expect a dividend yield of 14% in fiscal 2022, according to Yahoo Finance. Since 2012, Apple Inc's average compensation rate has been 24%. Expected spending rates last year and this year are well below the already very low long-term average.

Let's consider free cash flow. The company allocated $14.5 billion in free cash flow in the last fiscal year and generated nearly $93 billion in free cash flow, with a payment rate of 16%. Over the past three years, the average free cash flow payment rate has been 21%. Similarly, the recent ratio is below average.

Finally, let's look at the company's debt to better understand how its debt affects future dividend growth.

The company's interest expense for its most recent fiscal year was $2.6 billion. Total debt is A $124.7 billion, equivalent to a weighted average interest rate of just 2.1 per cent.

The following table shows where Apple Inc's weighted average interest rate before dividends will not be paid by free cash flow alone.

Before free cash flow cannot cover dividends, Apples's weighted average interest rate needs to be more than 65 per cent.

For a company the size of Apple Inc, it is unlikely not to continue to increase dividends because of its extremely low payment rate and highly manageable debt levels.

The last thought

Dividend aristocrats tend to have deep-rooted business models that generate enough profits and free cash flow to pay growing dividends. These companies often have products and services that consumers need even during an economic downturn. They must also have a management team that is willing to return capital to shareholders.

Apple Inc checked all these boxes, and then some. Companys's ecosystem allows customers to use multiple products at the same time to enhance the user experience. This helps create loyal followers among many of Apple Inc's customers.

In the long run, almost all indicators have shown strong growth rates, and most, if not all, have accelerated in the short term.

Apple Inc's return on capital is very generous. Companies are able to do this because of the amount of capital generated, which leads to extremely low returns and free cash flow payment rates. Debt is also unlikely to affect dividend growth, given the free cash flow generated by the company.

Taken together, Apple Inc may one day become a dividend aristocrat.

It is pure fiction