With a dividend boost likely just around the corner, Apple's (AAPL +0.73%) valuation just doesn't make sense. I recently highlighted Apple as one of two stocks to buy in April. In this article, I'll take the analysis further, comparing Apple to other blue-chip cash cows.
Judgment day
Yes, the market is an untamed and unpredictable beast... in the short term. But in the long term, price typically follows the value of an underlying business -- especially when the company commits to a significant dividend. In other words, a high enough boost in Apple's dividend will finally persuade the market to acknowledge the company's ability to turn products into mountains of cash.
One analyst estimates that Apple could easily afford to boost its annual dividend to $15 to $20 per share. At today's price, Apple's dividend yield would amount to 3.5% to 4.6% at these payouts. These days, 4% dividend yields are hard to come by -- especially among cash cows (as we'll see below). If Apple announces a payout that amounts to a dividend yield greater than 4%, there is a good chance the stock would rise as investors buy up shares to take advantage of the high yield.
Comparatively, Apple is a bargain
Based solely on fundamentals, Apple is a steal -- especially when compared to these blue chip stocks.
McDonald's (MCD +0.09%) is a great, consistent company. It has generated steady free cash flow ranging from $3 billion to $4 billion for the last five years. Its scale advantages are unrivaled among restaurant operators. But the company faces some challenges, too. The quick-service industry tends to be highly competitive, and its history is littered with price wars.
MCD Dividend Yield data by YCharts.
Apple is cheaper than McDonald's in terms of its dividend yield, but that could change very soon. With regard to Apple's free cash flow yield, or free cash flow divided by price, Apple is far cheaper than McDonald's, with a free cash flow yield of 11.4% compared to McDonald's 3.85% yield.
Wal-Mart's (WMT +2.16%) low-price strategy has produced reliable cash for the company for years. The company's free cash flow ranged from $10.7 billion to $14.1 billion over the last five years. As it continues to reinforce its everyday-low-price model, the company is proving that price still matters. But challenges are mounting. Competitors Costco and Amazon both have lower fixed-asset bases and operate on minuscule operating margins. Morningstar analyst Michael Keara thinks pressure from these two companies will force Wal-Mart's operating margins lower in the long haul.
WMT Dividend Yield data by YCharts.
Apple is almost neck-and-neck with Wal-Mart as measured by dividend yield. Once again, however, in terms of free cash flow yields, Apple is far cheaper. (Apple's free cash flow yield is more than double Wal-Mart's.)
I realize these two companies are not tech stocks, but they are cash cows -- like Apple. But let's run one last comparison within the tech sector. How does Apple measure up with Microsoft and Intel, two blue-chip stocks that are arguably in declining industries?
AAPL Dividend Yield data by YCharts.
Apple is more expensive when measured by dividend yield, but it's neck-and-neck with Microsoft in terms of free cash flow yield, and much cheaper than Intel. Keep in mind that if Apple decides to boost its dividend significantly, as many analysts predict, Apple could become cheaper by that measure as well.
Also, Samsung may be tough competition, but analysts still project Apple to grow earnings over the next five years by 20% annually. The company scores exceptionally high on its Motley Fool CAPS page, with the majority of All-Star players ranking it outperform, and 60 of 60 Wall Street analysts ranking it a buy.
Can you find a cheaper cash cow?
I'm interested to know if you can find a cheaper blue chip cash cow? If you have one in mind, please state your case in the comments below.
