Apple stock trades lower after earnings

Why I Like Apple Stock Even After Earnings Dropped

Today, Apple Inc. (AAPL) announced that profits were down 27% and that revenue was lower for a second consecutive quarter. Still, even with this seemingly bad news, I’m still a fan of Apple stock for income investors. Here’s why…

Apple Inc. Is Going Through a Major Transition

Apple Inc. is no longer a growth company.

There, I’ve said it! A year or two ago, this would have been considered heresy. But today, investors are getting used to the idea that Apple is no longer growing.

You know what? That’s actually a good thing in my book. Because now, investors can buy Apple stock at a reasonable price. Better yet, as a more mature company, Apple is making decisions that are better for investors.

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Growth companies typically have a huge need for cash. This cash is used to fuel growth, by paying for things like manufacturing facilities, to hire top talent, and for marketing.

Mature companies generally don’t need as much cash. These companies have already built their infrastructure, and less money is needed for aggressive growth projects.

As the world becomes more saturated with iPhones, Apple has less room to grow its flagship product. The company is now transitioning to the role of a mature firm. and Apple stock investors have more reasonable expectations for the company.

Apple Stock Trades At an Attractive Discount

Apple stock is currently trading at about 12.4 times expected earnings.

Apple stock forward PE(source: Y-Charts)

This is a relatively low valuation compared both to Apple’s historic levels (save the 2011 drop) and also compared to the market. The S&P 500 has a current valuation near 19 according to Bloomberg’s more conservative estimate.

But the picture gets even better from there.

That’s because Apple Inc. currently holds roughly $11.45 per share in cash. (This, pulled from my Bloomberg terminal after Apple announced earnings this evening.)

When you back out the extraordinary cash balance Apple is sitting on, Apple stock closed Tuesday at roughly 9.6 times 2017 expected earnings. That’s a very cheap price for such an iconic and profitable technology company!

With So Much Cash, Apple’s Dividend Should Rise Over Time

In September of 2012, Apple stock paid out its first quarterly dividend. Since then, the company has periodically increased its dividend. Today, Apple announced a 9.6% increase to its quarterly dividend, paying Apple stock shareholders $0.57 per quarter for a dividend yield of 2.4%.

At the same time that Apple has been increasing its dividend, the company has also been using cash to buy back shares. The chart below shows that the number of AAPL shares outstanding has dropped by 16.8% over the last three years.

AAPL shares outstanding(Source: Y-Charts)

When a company buys back shares, it means that each remaining share represents a bigger percentage of the overall company. That allows profits to be spread over fewer shares, giving investors more a greater portion of Apple’s profit.

The really impressive thing to notice is that while Apple has been boosting its dividend, and Apple stock has been bought back, Apple’s cash balance continues to grow.

This is a great problem for a mature company to have. And I believe that Apple is going to solve this problem over time by doing the same thing it has been doing over the last three years. Increasing dividend payments and buying back shares.

Today you can buy Apple stock at a price that is cheaper than the market. You can get a dividend yield that is better than the yield on the S&P 500. And you can expect your dividends to grow as Apple continues to generate profits and look for ways to distribute cash to shareholders.

So despite the lower earnings this quarter, I still like Apple stock for income investors.

Zach Scheidt