Apple’s (AAPL) share price has been on the rebound ever since Carl Icahn’s infamous tweet reignited interest in the company. Still, Apple stock is down 30% from its all-time highs hit last year, and there is a general consensus that the company’s days of rapid growth are behind it.
A common question I hear asked is whether Apple stock is destined to follow in Microsoft’s (MSFT) footsteps, suffering years of underperformance.
Microsoft, like Apple, once held the distinction of being the most valuable company in American history. (And adjusted for inflation, Microsoft’s 1999 high-water mark still holds the title.) Today, Microsoft’s share price is still 40% below its dot-com-era peak … 13 years later.
There certainly are some similarities. Both companies were dominant in their respective areas of expertise: Microsoft in PC operating systems and office productivity software and Apple in smart mobile devices. Both companies were led by brilliant technology visionaries in their heyday, and now both are led by less-imaginative “company men” (at least until Steve Ballmer’s replacement is announced). And both, once they grew to a certain size, found their markets mature or close to maturity with fewer obvious avenues for growth.
But there is one major difference between the two stocks: valuation.
In 1999, Microsoft’s valuation had reached absurd, nosebleed levels that were (sadly) typical for the time. Microsoft peaked with a trailing price/earnings ratio of over 70 and a price/sales ratio of over 20.
We’re talking about the peak of one of the greatest stock bubbles in history. From those levels, Microsoft was doomed to years of stock price correction, regardless of how successful the company was operationally. Ballmer can be faulted for missing the boat on the mobile revolution and for a generally sloppy history of acquisitions during his tenure. But Microsoft’s stock underperformance since 2000 is a product of an unrealistically high starting price.
Now, let’s take a look at Apple stock.
AAPL is peculiar because its trailing price/earnings ratio and price/sales ratio actually trended downward throughout its meteoric rise in the mid-to-late 2000s. At its peak last year, Apple stock traded hands for 13 times trailing earnings — hardly a bubbly valuation by any standard.
What does this mean going forward? Is AAPL destined to become the next Microsoft?
If we’re talking about the share price, I would say no. Apple stock trades at a steep discount to the broader market, and the company is aggressively raising its dividend. Although AAPL is no longer the growth story it once was, it’s a profitable company with a cheap stock.
If we’re talking about shareholder friendliness, then I legitimately hope Apple follows the path of Microsoft. MSFT has raised its quarterly dividend from 8 cents per share in 2003 to 28 cents today. A similar move by Apple would represent the greatest transfer of wealth to investors in history.
Microsoft also has reduced its share count by 23% since 2005 and plans to aggressively continue its share buybacks in the years ahead.
As an investor, you cannot control the future direction of the market. But you can control the price you pay. And today, both Apple and Microsoft are reasonably priced stocks with a high probability of seeing continued dividend growth and share count reduction.
This article first appeared on MarketWatch.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he had no position in any security mentioned. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.