Monday, April 29, 2013

An Apple for Grandpa ... Apple is a Dividend Paying Value Oriented Investment for This Grandpa DIYer

I'm a Grandpa. I'm also a long term DIY investor in quality blue chip dividend paying stocks.

That brings me to technology. Among others, I've owned shares in Microsoft and Intel for several years. Microsoft has a current dividend yield of 2.89% and Intel has a yield of 3.851%.

And that brings me to Apple. Its cash dividend yield is near 3% and cash dividends are likely to increase over the next several years. {So is the price of Apple stock which is up another ~3% this morning.}

As a comparison, ten year U.S. Treasury bonds yield 1.67%.

And Apple has also increased its share price supporting stock buyback program to $60 billion from its former level of $10 billion. Apple is now a stock for value investors and that's what Grandpas either are or probably should be.

Rethinking Apple: Growth Stock, Value Play -- Or Both? says this about Apple's transition from a growth stock to a value oriented, high dividend paying investment:

"If you're an Apple stockholder, there's good news and bad news.

The good news is the stock is once again an attractive investment—especially after plunging from September's $705 peak all the way down to $417. The bad news is that many of its most loyal fans might be holding it for the wrong reasons.

Many people still think of Apple as an exciting "growth" stock, promising hockey-stick returns. They're wrong. These days the company is better viewed as a so-called value stock—a slightly dull one that should be owned for the cash flow and dividends it generates, much like, say, a Johnson & Johnson.

Investors in both camps own it. Those still hoping for big growth were disappointed this week when Chief Executive Tim Cook failed to unveil a new breakthrough product. In preceding weeks the rumor mill had been churning as usual, talking of Apple watches, or a new iPhone with a bigger screen, or an upgrade to the iPad Mini. . . .

Instead, Mr. Cook announced plans to ramp up Apple's moves to return cash to investors through higher dividends and by repurchasing some of the company's stock. In total, Mr. Cook said, the company would return $100 billion through the end of 2015.

Wall Street analysts are divided on stock repurchases. Many times, they argue, these repurchases aren't the best use of a company's money. Yet a look at Apple's finances shows why Mr. Cook's plan makes sense and is likely to benefit investors.

There are 950 million Apple shares in existence. At $417 each, the entire company is valued at $396 billion. Yet Apple is sitting on net cash, investments, inventories and receivables, minus all liabilities, worth $110 billion. So, on a cash-free basis, the "enterprise" value of the company is just $286 billion, or about $301 per share.

That is less than eight times forecast per-share earnings of about $40 in the fiscal year ending this September and seven times the $44 forecast in the subsequent year. By contrast, the Standard & Poor's 500-stock index, the most common benchmark for the overall stock market, trades at about 14 times forecast per-share earnings.

The challenge for Mr. Cook and the Apple board is to return a substantial amount of that cash pile to investors, compensating them for holding the stock. To be sure, there are complications. Some of Apple's cash is parked offshore and would first be taxed at U.S. corporate income-tax rates if returned to stockholders. The company instead plans to borrow cash to help pay for buybacks, avoiding the tax hit.

Right now that money is earning very little interest. Using it to buy back stock and reduce the share count will increase the earnings per share for those investors who don't sell. Apple will also spend some money raising dividends by 15%, to $3.05 per quarter. The annual yield, meaning dividends divided by the stock price, is now 2.9%. That is much higher than the 2.1% yield on the S&P 500. . . .

Apple isn't a perfect value stock. It operates in a more volatile industry than. say, utilities or food companies. . . .

However, while competition and changing consumer tastes might put pressure on the company's earnings, there is also plenty of potential growth to offset that, say analysts. The markets for smartphones and tablets are still growing quickly. Sales remain comparatively small in big markets overseas, especially in Asia, they say.

Apple might yet launch new innovative products as well. . . .

Once upon a time, Apple stock was as exciting and dynamic as an iPhone. Today Grandma owns an iPhone. She can also own some Apple stock."
Summing Up
While I don't own an iPhone, this past week I did buy some Apple shares. I intend to buy more and own them for a long, long time.
It looks like a great long term dividend paying and share price appreciating blue chip investment to me.
Thanks. Bob.

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