Yes, unless you are still using a Lisa computer, you probably heard the news today about the Apple Inc. (Nasdaq: AAPL) dividend plan. The company will pay a quarterly dividend of $2.56 per share starting in the quarter beginning July 2012. Apple shares hit new highs on the news today, rising $13 or 2.25% to nearly $600 per share.
The news was announced in conjunction with a share repurchase plan. Apple's board of directors has authorized a $10 billion stock buyback. Both dividends and share buybacks are considered shareholder-friendly policies, because they return cash to investors and reduce the share count. Apple, which has piled up more than $90 billion in cash and long-term investments, has been under pressure from shareholder advocates to return some of that stash to investors.
Generally, the reaction was warm and fuzzy with both analysts and investors lauding the move. But perspective is needed. Investor Uprising is pleased by the news, because Apple has been included in our IU25 Index of leading stocks, and the company has helped our index outperform this year. But let's not all pile into Apple stock now because of a measly 1.8% dividend. After a 4,500% gain since 2002, the dividend is largely like a speck of dust on the sun. I guess grandmas around the world can rejoice, because Apple is a blue-chip dividend stock.
There is nothing wrong with a dividend. In fact, it's always great when companies return money to investors. But let's recall that the big future gains (or losses) for Apple investors and traders will have nothing to do with dividends. They'll have to do with large movements in the stock price. And even though the market may be trying to convince you otherwise, it is possible for Apple stock to fall in large chunks, even if it is just a short-term pullback.
Apple is still a growth stock, so investor returns are likely to depend on maintaining a high profit margin and good growth numbers. The stock was added to the IU25 Index in April 2011 because it was really cheap. At that time, I pointed out that it was trading at a price/earnings ratio of 12 and a P/E/growth (PEG) ratio of 0.74.
I realize it's harder to buy a stock with a market cap of more than $500 billion and expect big returns. I still think Apple is a great stock, and it is still reasonably priced. However, investors do need to realize that Apple carries large macro risks if the economy slows. It lost 50% during the financial crisis of 2008.
This might be a great time to review Apple's amazing run in the last 10 years:
- If you bought Apple 10 years ago today -- on March 18, 2002 -- you'd be up 4,500%. That means if you had invested $5,000 in Apple, that investment would be worth $225,000! Don't have a heart attack -- so far I've met nobody who did exactly this and kept the entire investment. However, I must credit my dad, an Investor Uprising contributor, who has always been an Apple fanboy and kept all of the shares he started buying back then! Yes, he's made a nice bundle, I hear.
- It hasn't always been a cakewalk, though. During the financial crisis in 2008, Apple plummeted from nearly $200 per share to less than $100. So that 50% one-year loss puts a 1.8% dividend in perspective, doesn't it?
- Apple's cash flow from operating activities (a good measure of how fast it is accumulating cash) went from $10 billion in the fiscal year ending September 2009 to $37 billion in the fiscal year ending September 2011.
- CEO Tim Cook has been an Apple officer since 2002.
- Apple was No. 289 on the Forbes 500 list in 2002, with a market value of $8.6 billion and profits of $208 million. By 2011, it had climbed to No. 35 of the Forbes 500, with about $14 billion in profits. (That's right, the profits rose about 700%.) And its market cap has topped that famous $500 billion mark, making it the most valuable company in the world.
That's fine, Scott, you say. But what do we do now if we missed out on the 4,500% run? If it's any consolation, I mentioned earlier that Apple is not yet an "expensive" stock in P/E terms. Its forward P/E multiple is a modest 12. Its trailing multiple is 17. Split the difference, and you get about 15, which is average for the S&P 500. There is nothing wrong with owning an outstanding company at an average valuation.
But with a market cap of $500 billion, it looks like it's pretty much impossible to grow another 4,500% from here. One thing you might conclude about the new dividend plan is that Apple is entering its next phase as a mature, profitable company.
Maybe Apple is becoming a grandma stock.