Transitions can be hard, and Apple's (AAPL 1.25%) 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.
