Apply recently turned 40…
Is it past its prime?
Does Apple have what it takes to keep consumers and investors happy, or is last year’s rollercoaster ride a sign of things to come?
With the FBI’s case against it now officially dropped—although probably not forgotten by either the government or the technology industry in general—and its release of the iPhone 5 SE over and done, Apple Inc. (NASDAQ:AAPL) can get back to the business for which it’s best know: making scads of money.
Sure there are those that want to cling to the notion that APPL is dead money walking, with little future stock price appreciation or return available. But a quick Google (NASDAQ:GOOG) search of “Apple Dead Money Stock” provides a slew of backdated results circa 2013-2014.
Just like then, rumors of Apple’s diminishing stock returns, flagging product announcements, and worries about consumer complacency, not to mention fears of global recession, are just a bit overblown.
Yes, global demand for Apple’s cash cow, iPhones, is slowing down. In its first quarter (12/26/15) Apple acknowledged as much, indicating that sales grew barely over 1% on a year-over-year basis, it’s slowest growth rate ever.
Apple also admitted growth rates are bound to slow in the near future, suggesting the top line for the current quarter ending March 30 will show revenues between $50-$53 billion, down from $58 billion in last years Q1 period, and below analyst estimates of $55.4 billion.
So, yes, the product that serves up nearly 2/3 of Apple’s revenues is slowing down a bit.
But it’s also not a reason to panic yourself out of the position you may already be in today, or to ignore the stock for a future run.
Slower growth is already built into AAPL’s price. At a current TTM of 11.4x earnings, Apple is well below the S&P’s current 22.4x, by nearly a full 100%! Apple’s forward P/E of 10.75 suggests an even bleaker future although the S&P 500’s 17.5x earnings is suggestive of a slowdown across the board.
So is it time to panic? Hardly.
You see, what Apple does is print money regardless of a top line slowdown.
Apple’s efficiency in selling what designs, manufactures, and markets is extraordinary: 40% gross margins lead to profit margins of nearly 23%, generating free cash flow of $53.8 billion over the last 4 quarters.
Even after paying dividends of over $8 billion and buying back over $36 billion of its own stock, Apple has nearly $10 billion left over.
The point is this: Unlike dead money stocks where no return is anticipated for the long run, Apple has plenty of room to run on its annual dividend, which, no matter how you slice it, means returns for investors.
Apple’s somewhat meager 1.9% dividend yield and 22% payout ratio are easy pickings for Apple CEO Tim Cook to increase to help smooth over revenue slowdowns and possible stock price swoons.
Indeed, RBC Capital analyst Amit Daryanani is looking for a 10%-15% rise in the dividend this year, which would put its yield over the 2% threshold. With its hundreds of billions of dollars in cash (even though much of it is overseas), Apple can easily handle dividend increases virtually in perpetuity for investors.
As for Apple’s stock prices, while it might have lagged a tad over the past year, down just over 12%, recent rally’s have carried AAPL stock into the black year-to-date, and the stock is still nearly 25% below its 52-week high.
Again, there is plenty of room to run.
With Apple reporting those first-quarter earnings after the bell on April 25, investors can expect some ups and downs as investment managers hedge their bets against expectations before the announcement, and reality afterwards.
Don’t be deterred. Apple lives in the same neighborhood as all technology stocks, indeed, for the markets as a whole. Global growth is growing incrementally at best, currency headwinds are blowing hard against the dollar, and China, well nobody really knows what’s going on with any conviction.
What we do know is that Apple will continue to design, develop, market and produce products that make money for its bottom line and investors. And while waiting for those to all happen, Apple will pay you quarterly for the pleasure of hanging tight.
That’s not what I call “dead money.”