AAPL: 6% payout leaves lots of room for a value stock to grow

Rochelle Jenks

The first step to solving a problem is admitting there is one, right? So, simple acceptance can be the turning point. The thesis that Apple (AAPL) is no longer a growth story and is now a value play may well be the key pivot in Apple’s recovery. For its share price is no longer just a blip or a bump on the chart; Apple’s share price appears stuck in a trough.

Some experts explain that Apple was being valued as a high-growth stock along the same lines as one sees now with Wall Street darlings Amazon (AMZN) and Netflix (NFLX). Amazon is expected to earn $1.47 per share in 2013. Yet Amazon sells for an average the past 200 days of just over $250. At over 180, the current P/E for Amazon is 13 times its industry’s average of 13.69. Netflix has surged the past 50 days to an average share price of $140 hitting a 52 week high recently of more than $197. Yet Netflix is expected to earn only $1.31 per share in 2013. The Netflix P/E of nearly 150 hovers between 5 and 6 times its industry’s average of 26.47. The rationalization for this data is that price-to-earnings is not a pertinent measure for a growth stock. Analyst projections for Amazon’s five-year EPS growth is over 40% and Netflix’s estimate is 18.75%.

To be fair, a quick review of Apple’s “growth” story shows a top P/E ratio of 98 in 2004. In 2007, it did hit 52 again. In 2012, the P/E vacillated from 9 to 16. To argue that one cannot expect Apple share prices to continue to be priced like a growth stock assumes that it ever was. The data, especially the most recent, does not support that premise. And, by the way, analyst projections for Apple’s five year EPS growth is 18.98%. Isn’t that more than the Netflix estimate?

Regardless, sentiment cannot be ignored and apparently, it is time for Apple to transition to a value play. The same experts recommend Apple should now be viewed more like industry stalwarts Microsoft (MSFT), Intel (INTC) or Cisco (CSCO). Microsoft’s P/E is 9.84, Intel’s is 10.88 and Cisco’s is 10.78. Apple’s P/E is 10.29 – right in line with its new flock. Assuming Apple’s investor base has started shifting to a different breed, one that values valuation, then it is time for Apple to transition as well. The old idiom “If it walks like a duck and talks like a duck, then it’s a duck” should be Apple’s new mantra. It is time for Apple to waddle and quack.

Giving credit where credit is due, Apple did institute a dividend in 2012, a proverbial first feather. Some argue the amount is trivial, insulting and ineffectual. Actually, comparatively, that is somewhat true.

The latest statistics from Factset for the S&P 500, based on the third quarter of 2012, show an aggregate dividend yield of 2.1%. The ten year average is 2.0%. At its current share price and dividend, Apple fits into that model at 2.3%.

However, the aggregate payout for the S&P 500 is 29.1%. In 2012, Apple’s payout ratio for a partial year was just 6% compared to 41% for Intel, 19% for Cisco and 38% for Microsoft. Even extrapolating a full year of dividend payments, Apple’s ratio would have been just 12%. That certainly leaves plenty of room for Apple to adjust.

And, adjustments are not atypical in the Technology sector as it routinely leads the S&P 500 in dividend growth. For four quarters, the sector has boasted greater than 20% year-over-year growth with the 2012 third quarter’s percentage ringing in at 32.9%. Just last August, Cisco increased its dividend 75% after initiating it in 2011. As impressive as Cisco’s leap is, Seagate Technology (STX) led the sector with a trailing twelve month (ttm) growth rate of over 85%. Of 39 companies in the Technology sector of the S&P 500, 32 increased dividends in the trailing twelve months. Microsoft even ranks in the top ten of S&P 500 dividend payers for the trailing twelve month period. Both Microsoft and Intel boast five-year dividend growth rates over 14%.

Besides a better alignment of payout, another reason for Apple to increase its dividend is to establish its track record as a dividend-grower. The characteristic of multi-year dividend growth is a filter for some mutual funds and exchange-traded funds. Individual investors looking for steady revenue streams value the trait as well.

But, increasing its dividend is arguably not the single mutation needed for Apple to waddle and quack. While some rally for Apple to execute a stock split, that effort seems expensive, wasteful and moot. Many argue that some individual investors can not afford a $500 stock. But, the reality is with online trading, there are no quantity minimums for purchase. The individual investor buying one share at $500 is no different than one buying 10 shares at $50 or 100 shares at $5.

Rather, as a value stock, Apple should institute a dividend reinvestment plan (DRIP). From the DRIP Starter Guide (for individual investors):

Because of the low financial requirements to invest via a DRIP, the plans allow even the smallest investors to invest in the stock market.

Through a DRIP, instead of cashing out dividends, shareholders may purchase additional, and even fractional, shares of the company’s stock. Long considered one of the best secrets ever revealed to individual investors, DRIPs have proven to be more financially beneficial to shareholders. Because dividends begin paying dividends, there is a compounding effect that leads to greater value.

While the benefits of DRIPs for investors are well-proven and well-documented, there are also benefits to the company. Shareholders enrolled in a DRIP tend to have long-term philosophies, more of a “buy and hold” mentality. Fluctuations in stock price are less troublesome to that type of investor whereas short-term traders can make price swings wider and more volatile. Dips in price are often seen as buying opportunities for long-term investors and that mentality can help a stock price form a solid base and, thus, stabilize. A DRIP enhances shareholder satisfaction and improves loyalty. It is not unusual for a company to have more than 50% of its shareholders enrolled in its DRIP.

Apple already utilizes Computershare, a leading provider of investor services, as its transfer agent. Computershare administers direct stock purchase plans and dividend reinvestment plans for 600 companies worldwide. Its service is well-established and, therefore, should be of minimal impact for Apple to initiate.

Microsoft, Intel and Cisco offer DRIPs. Microsoft and Intel have a solid track record of growing dividends while Cisco made a notable first-year step. If Apple is going to be referenced alongside these three now, Apple should walk the walk and talk the talk. Apple should accept its fate, pivot at this juncture and join the flock. It is time for a dividend increase – no less than a double-digit percentage increase, AND a DRIP. It is time to waddle and quack.


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