Apple's stock has already been riding a roller coaster for the past year, topping at nearly $133, dropping 30 percent to $92 and then rallying again to nearly $124. Then after its most recent earnings report was a disaster, Apple fell again by 8 percent.
As AAPL continues its slide toward $90 a share, the question is whether to buy, hold or sell the stock.
AAPL as an income stock. Most analyses focus on AAPL's growth prospects relative to declining iPhone sales and whether new initiatives can return Apple to a growth-company status. But what about holding AAPL as an income stock for future and current retirees? As investors approach retirement, the primary investment objective needs to change from portfolio growth to one that maximizes the portfolio's lifetime income potential. For income, many financial planners recommend an allocation to bonds for both income and safety.
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For comparison, it would be quite reasonable to find an investment-grade bond maturing in 10 years with a yield to maturity of 2.45 percent -- the equivalent of AAPL's latest annualized dividend yield. With the bond, an investor that invested $100,000 would receive $2,450 per year for 10 years, a total of $24,500, then get his $100,000 back.
The attractiveness of AAPL is that the dividend has been increasing by about 10 percent for the last couple of years. Unlike the bond investor locked into $2,450 a year of income, an AAPL stock investor could be receiving a $5,776.97 dividend 10 years from now if the dividend grows at 10 percent a year. The 10-year total income would hypothetically be $39,046.69.
Even if AAPL's dividend growth rate gets cut in half to 5 percent in 10 years, the dividend would still be $3,800 -- a 50 percent raise over what the bond holder would receive. While dividends -- let alone dividend increases -- are not guaranteed, companies are extremely reluctant to stop or even slow a trend once established.
Will AAPL continue dividend growth? While it may seem a stretch that a company can be expected to increase its dividend at a 10 percent clip, consider that Procter & Gamble Co. (PG) has done so for 19 years (a 10.3 percent average rate), Chevron Corp. (CVX) at 7.9 percent, Lowe's Companies (LOW) at 22 percent, Genuine Parts Co. (GPC) at 8.5 percent and Sherwin-Williams Co. (SHW) at 11.5 percent, to name a few.
The first thing to notice it that these companies are not characterized as growth darlings. "Steady Eddies" would be much more appropriate. This is an important consideration. The fact that Apple's best growth days may be behind them is not necessarily a negative to a dividend investor.
In fact, if Apple cannot generate significant shareholder value through stock appreciation, the more likely they are to keep shareholders happy with a fat and growing dividend. The question being is whether cash flow is available to continue to do so.
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In the last quarter -- the worst in a decade -- Apple generated net income of $10.5 billion, or $1.90 per share. Its annual dividend (after the most recent increase) is $2.28 per share. Based on this quarter's earnings, AAPL covers its annual dividend with 3.6 months of earnings. Based on projected earnings, the payout ratio (the amount of earnings that go to pay the dividend) is just 23 percent. PG's payout ratio, by comparison, is 81.4 percent. Apple's iPhone sales would have to virtually fall to zero for AAPL to not have cash flow to pay its dividend.
Future earnings are still a projection. What we do know is that Apple is sitting on a $161 billion net cash position (cash less debt). With this cash hoard, it can pay the current dividend for 14 years without any earnings.
That cash hoard is the future of AAPL. For the income investor, it represents the potential for a rising income stream throughout retirement. For investors seeking growth, it represents potential cash to invest in future growth and technology.
To put things in perspective, consider this. While Apple has not released a lot of concrete information, everyone presumes that an Apple iCar is in the company's future. If instead of building its own manufacturing capacity and distribution network, Apple could buy Volkswagen for about $70 billion and still have money left over to buy UBS Group AG (UBS) so it can finance consumers' purchases of their iCars.
This is not to say that buying shares of AAPL is at all similar to buying a 10-year bond. But while a typical stock investor looking to beat the market is very likely to be disappointed holding AAPL stock in their portfolio over the year or two, an income investor can take what appears to be a moderate long-term risk and potentially be potentially rewarded with a rising income stream, instead of flat bond income stream.
As of this writing, 401 Advisor is long AAPL in both its income and growth portfolios. Certain of the information contained in this article is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. 401 Advisor believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
William DeShurko started in the financial services industry in 1987 and formed his own practice in 1994. He is a portfolio manager for Covestor, the online investing marketplace, and owner of 401 Advisor, LLC a registered investment advisor in Centerville, Ohio. After following fads, phases, and products of the day for nearly 30 years, he hopes that his insights and experience can help today's investors navigate the financial markets. You can read more of his insights at www.deshurkoblog.com or contact him directly at firstname.lastname@example.org.
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