Apple Inc. Stock's Dividend Makes the Stock a Buy

Apple (NASDAQ: AAPL  ) stock is still looking sweet. Even when you leave out the prospects for new categories the company is working on, the fundamentals alone are downright convincing. Its enduring cash flow may simply be worth more than the market is valuing it at.

Rendering of Apple Campus 2. Apple's next-generation headquarters is currently under construction. Image source: Apple.

Consider these three factors that point to an undervalued cash cow asset.

1. Durability
First, and foremost, Apple has staying power. Google's Android mobile operating system that competes with the iOS ecosystem is certainly getting better, but Apple isn't going anywhere.

In the U.S., Apple's most important market, Apple is still the dominant force. To see how, just look at the health of Apple's largest and most profitable business segment: smartphones. Apple's iPhones boast a 41.6% share of the U.S. market, according to a June report from comScore. This trumps second-place Samsung, who has a 27.7% share of the market.

And in China, where one of Apple's most important growth opportunities lies, the company is dominating high-end smartphone sales. Of the 27% of smartphone sales in the country in the $500 plus category, iPhones have about an 80% share, according to Chinese app analytics firm Umeng. 

Apple store in China.

Combining Apple's leadership at the high-end with its "sticky" ecosystem, there's no sign that Apple's customer retention or pricing power will begin to decline any time soon.

In other words, Apple's stream of cash flow is here to stay -- and possibly even grow if Apple can grow its smartphone business as the overall segment continues to swell.

2. Valuation
Apple stock is cheap, or at least reasonably priced. There's no if, ands, or buts about it. Consider, for instance, that Apple stock trades at a price-to-earnings ratio of just 15.3. Compare that to the S&P 500's P/E of about 19.3.

Looking past earnings to free cash flow, the stock looks even more enticing.

AAPL Price to Free Cash Flow (TTM) Chart

AAPL Price to Free Cash Flow (TTM) data by YCharts

3. Lucrative cash flow
My favorite argument for owning Apple stock lies in its uncanny ability to consistently generate loads of cash. Consider: About 26 cents of every dollar of Apple's sales ultimately ends up turning into free cash flow -- or the cash left over after operations and capital investments are taken care of.

What can businesses do with free cash flow? Save it for future capital investments, pay it out in dividends, repurchase shares -- all the good stuff that builds shareholder value.

Given the scale of Apple's cash flow, it's impossible for the company to continue reinvesting all of its profits back into the business. And, fortunately, Apple isn't hoarding this cash flow. The company has both a generous share repurchase program and a meaningful dividend.

And perhaps best of all, Apple gave investors reassurance this April that it plans to increase its dividend on an annual basis, going forward. This means investors who buy Apple shares today will watch their dividend payout grow in the coming years. Even without accounting for future increases, however, the dividend is yielding a return of 2% -- one that easily crushes the return most people see in their savings account.

In a conservative forecast, here's how the payout could look in the coming years.

Forecast by author.

Not a bad dividend for a stock that costs only $91.98.

Combining Apple's staying power, a conservative valuation, lucrative cash flow, and a shareholder-friendly plan to return cash to shareholders through repurchases and dividends, Apple stock may be poised to outperform not only your savings account, but the broader stock market as well.

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Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On June 29, 2014, at 8:42 PM, Chiam wrote:

    Seriously, when I see a SeekingAlpha article I get interested. Motley really has jumped the shark and is so predictable.

    This article is silly and Apple is overpriced at these levels. Cook has to come out with the goods everyone is dreaming about. Otherwise we are betting on things that may not come about. Knowing how Cook has performed so far, I am not confident. The stock has run up based on a good earnings report (finally) and buy backs.

    Let's not get ahead of ourselves. We have almost 3 months until the release of the new phone and we can see if sales match expectations.

    The 5.5 phone won't be out this year and the watch could come next year in October. There is no way Cook can deliver so many items at once. He is always constrained. He just can't meet schedules.

    With sales dying for the older phones, expect two misses in a row on earnings. Also iPads are dying so that won't help. New categories. let me stock laughing.

    Cook had said new things all this year. Nothing yet. So he comes out with bigger phones and the world acts like he is a genius. Wow bigger phones? Who has those.

    Also during Android i/o the other day, Google pointed out how most of the things Apple bragged at adding to IOS 8 were done in Android 4 to 5 years ago. Apple is playing mostly catch-up. What a joke. Bigger phones and adding features Android had 5 years ago.

    Is this the Genius COOK? No in my book. Apple is in big trouble and this jerk needs to get canned

  • Report this Comment On June 30, 2014, at 7:01 AM, mcbob wrote:

    Wow. Serious hatred for Apple being spouted there. Don't let your opinions of the hardware cloud your view of a great investment. Who cares who came first? As an investor I care who's making money from it. And that's Apple.

    Disagree? Short it. Go on, I dare you, put your money where your mouth is.

  • Report this Comment On June 30, 2014, at 10:17 AM, mcsandberg wrote:

    @Chiam

    I'd suggest you take a look at this article http://seekingalpha.com/article/2292365-apple-app-developers... . I've developed apps for iOS and Android and I can assure you that the 80-20 rule is true. We get 80% of the revenue from iOS, yet Android takes 80% of the dev dollars. We probably won't do anything further with Android, therefor.

  • Report this Comment On June 30, 2014, at 11:05 AM, TMFDanielSparks wrote:

    @Chiam:

    Thanks for the comment. Here are my counterpoints.

    Since Cook has taken over revenue has nearly doubled, growing from $108 billion to a projected $182 billion this year.

    To justify Apple's price at current levels, investors don't need to "get ahead of ourselves" with bullish outlooks. All we have to do is expect more of the same to justify the price: slight growth.

    Apple is renowned for its operations expertise, and dramatically boosts year-over-year initial supply in every iPhone launch.

    Most analysts expect year-over-year gains in iPhone sales up until the next iPhone refresh.

    Cook doesn't have to be a genius to succeed. The businesses itself is positioned for long-term pricing power and customer loyalty.

  • Report this Comment On June 30, 2014, at 12:51 PM, ConstableOdo wrote:

    Maybe someone can explain to me why Google gets a P/E of double Apple's if Apple is supposed to be such a great buy. If Apple were such a great buy one would think that investors would be willing to pay more but that doesn't seem to be the case. Even with Apple's buybacks and dividends, Google's P/E has remained nearly double (31.xx vs 15.xx). And another thing, look at Google's institutional ownership percentage of 83% compared to Apple's measly 62%. That pretty much shows which company is seen as the better value for investors.

  • Report this Comment On June 30, 2014, at 2:59 PM, parteaga wrote:

    The deal is this... Apple is a tech company... Google it is not.. Google is an advertisement company.

    I like and have both stocks, but long term I think that Google has an edge over Apple.

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