Why Apple Is My Largest Holding

With Apple (NASDAQ: AAPL  ) pessimism near an all-time high and it's stock trading irrationally low relative to its fundamental earning power, I'm betting big on Apple. Here's why.

Apple is a cash cow
The company's dividend yield may not be meaningfully large today, at 2.7%, but I can say with near certainty that the Cupertino-based tech giant will continue to boost its dividend for years to come. Currently, the company is paying out just 27% of its annual earnings in dividends. This leaves quite a bit of room for the company to boost its dividend in the future.

Then there's Apple's massive cash hoard. Once a topic of criticism, the cash is now a fully loaded weapon. Enabled by the world's largest share repurchase program, the company is buying back shares in droves. In fact, Apple guru Horace Deidu explained on his blog, Asymco, that the company reduced its share count by a whopping 3.5% since the end of its first quarter (11 million of those shares are not yet reflected in the company's share count). In a roundabout way, that's basically a non-taxable special dividend yielding investors about a 3.5% return.

As Apple continues to pull the trigger on its $60 billion share repurchase program, investors should expect to continue to watch their share of the company rise.

Fundamentally, Apple is a straight-up bargain
The company trades at 11 times earnings and about 10 times free cash flow. At valuations like this, Apple is basically priced for zero growth going forward. Even if this is Apple's fate, investors can cash in on a dividend that's likely to grow for years to come.

Customers still love Apple
In its third-quarter earnings call, CFO Peter Oppenheimer cited Kantar's most recent study on Apple's iPhone loyalty rates; the smartphone boasts a retention rate of 93%. If that's not convincing enough evidence that customers still love Apple, consider its hot streak with J.D. Power and Associates' customer satisfaction awards. Then there's MarketingWeek and Forbes' separate studies that both say Apple is still the most valuable brand in the world.

So those are my three reasons. Though it should never guide every decision investors make, in this particular decision I take comfort in the lack of applause I know I'll receive for my bullishness on Apple. I'll take comfort in the bears' remarks. In this case, pessimism is my best friend. In this rosy market, I'm beginning to find greater comfort in the stocks that have missed the party.

Though dividends and cash flow may be all investors need to earn a decent return on Apple stock, it will take a new category to launch the company back into game-changing territory. If you are interested in Apple, why not read about the future of Apple in The Motley Fool's free report, "Apple Will Destroy Its Greatest Product?"


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