Is Apple Now Officially a Value Stock?

Transitions can be hard, and Apple's (NASDAQ: AAPL  ) monstrous drop today following its earnings is about as painful as it gets for shareholders. The transition from growth to value has been a long time coming, and Apple shares have long traded like other value companies even as it put up the type of growth that small caps long for.

The best of both worlds
With decelerating growth due to the law of large numbers, Apple's transition to becoming a value stock may be complete. Guidance calls for revenue to grow by just 7% in the current quarter, compared to the mouth-watering 59% gain that the company put up in the same quarter a year ago. Apple's traditional valuation metrics have long put it in the company of other heavyweight tech giants like Microsoft and Intel, and with today's drop it's even more firmly seated next to Mr. Softy and Chipzilla.

Company

Trailing P/E

Forward P/E

EV/EBITDA

Dividend Yield

Apple

10.3

8

7.8

2.3%

Microsoft

15.1

8.8

6.2

3.4%

Intel

9.9

10.1

4.6

4.3%

Source: Yahoo! Finance.

Apple's prospects remain much more promising than either Microsoft's or Intel's, even though its results were also hurt by the struggling PC market.

At current prices, Apple doesn't even need to get back to growth rates that high anymore. The company now pays out $2.65 per quarter in dividends and has recently instituted a share buyback program. With recent weakness, I would have liked to see an aggressive increase in the share buybacks to take advantage of Apple's pullback, but CFO Peter Oppenheimer said the company expects to return $45 billion to shareholders over the next three years between dividends and buybacks.

Apple's buyback program is intended to offset equity dilution, and in that sense, the buyback is accomplishing its stated task. Shares outstanding declined sequentially by a marginal amount, but that's better than the steady increase investors have been seeing without the program.

Cash is king
Some investors have been calling for a dividend hike to help support shares, but remember that this quarter is only the third quarter since Apple reinitiated its dividend, so I wouldn't expect the company to boost its dividend so soon.

Metric

Q3 2012

Q4 2012

Q1 2013

Diluted EPS

$9.32

$8.67

$13.81

Dividend

$2.65

$2.65

$2.65

Payout ratio

28%

31%

19%

Source: Earnings releases. Fiscal quarters shown.

Like other value stocks, Apple shareholders can expect the company to steadily increase its dividend over time as opposed to risk a big increase followed by a dividend reduction if the payments prove too generous. History has consistently shown that investors highly prefer steady payments in dollar terms with fluctuating payout ratios, as opposed to a constant payout ratio with fluctuating payments.

Apple certainly could have afforded a big increase since it now has an incredible $137.1 billion in cash and investments sitting on the balance sheet, but $94 billion of it sits offshore.

As Apple continues to grow, albeit at a slower pace than in prior years, it will likely increase its payouts over time as well, since it does have more money than it could conceivably need for operations. Apple generated $23.4 billion in operating cash flow during the last quarter alone, of which $21 billion was free cash flow.

Who needs growth?
Even as Apple has now pulled back by an incredible 35%, the company's business remains a solid cash machine unlike any other. Apple doesn't even need blistering growth anymore to justify the current valuations, but that doesn't mean it can't reaccelerate in the future with possible moves like lower-cost iPhones and continued tablet domination and adoption.

Value investors now have every reason to buy shares and will be handsomely rewarded over the long term through a reliable stream of increasing dividend payments. A little bit of capital appreciation never hurt anyone, but even if shares keep pace with the broader market, Apple is now a value buy.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (8) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2013, at 9:05 PM, TimKnows wrote:

    So should we place an order in at $ 350 and pray we don't lose even more money on this dog?

  • Report this Comment On January 24, 2013, at 11:36 PM, TMFNewCow wrote:

    No, Tim. You should put all of your money in RIMM January 2014 $20 Call LEAPS. After all, you already know RIMM will be at $150 by then.

    -- Evan

  • Report this Comment On January 25, 2013, at 4:00 AM, lojikfool wrote:

    Easy Evan, don't rise to the bait mate, there's a lot of emotions out there at the moment with hot money lost and people are looking for a place to vent. I don't want to degenerate those who have lost money who lash out, by the way Tim, degenerate means "to put down".

  • Report this Comment On January 25, 2013, at 10:33 AM, pondee619 wrote:

    Evan:

    Is that RIMM Call Leap call a serious recommendation?

  • Report this Comment On January 25, 2013, at 10:38 AM, trackjakeambrose wrote:

    apple was already a value stock but the heehaws sold it lower so now its a super value stock.

    as for tim hahahahahahahahahahahahah

    hehaw

  • Report this Comment On January 25, 2013, at 10:56 AM, TMFNewCow wrote:

    Pondee, no. the RIMM call is not serious at all. Please never invest in RIMM.

    -- Evan

  • Report this Comment On January 25, 2013, at 11:56 AM, CowboyAnalyst wrote:

    Emotions are definately high here when a CFA, oh excuse me it is actually CFA charterholder to make investment recommendations without reasonable and adequate basis.

    Simply put, investors have lost faith in Apple because Apple have lost its shine. Whether the stock is fairly valued at.these levels is up for debate and thorough fundamental analysis.

    imo, you will never see the growth that it has experienced in the past. Apple has cash, and I have some too. What good is it if it's not invested.

    Grow the emerging market, partner with China Mobile? Most if not all Chinese that wanted an iProduct already has one. Just like people using the pbones on Tmobile. Crazy right?

    Sell lower end models to make it affordable? This will kill the brand immediately, I honestly hope it does not come to this.

    Forget about Apple TV too. It's not innovative enough. Plus, Android TV will pop out everywhere.

    Apple had traditionally WOW'd the consumers. They will need something like that again. The iPod and iPhone up to about Iphone4, and iPad. But whatelse they got to keep you excited?

  • Report this Comment On January 25, 2013, at 1:48 PM, Borbality wrote:

    While i agree completely with the conviction in this article, that also leads me to worry a bit. Sometimes the obvious just doesn't go as planned!

    I did buy some shares this morning. Not enough to make or break me, but it's keeping me interested. The valuation is just too compelling right now.

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