Pacific Crest analyst Andy Hargreaves recently recommended that investors hold on to their Apple Inc. (NASDAQ:AAPL) shares. But it’s not because of new iPhone sales, but rather, the impending Trump tax reform. That will enable Apple to repatriate foreign cash to be used for increased dividends to owners of AAPL stock.
“We see potential for further upside to our unit and gross profit dollar estimates in the coming iPhone cycle, but believe growth beyond that will slow substantially,” Hargreaves wrote in a note to clients. “Consequently, we believe tax reform and a subsequent increase to the dividend may be necessary to drive significant upside in AAPL.”
Seriously, if that’s why you’re hanging on to your Apple stock, do yourself a favor and sell now. There are better dividend stocks to own in industries with much less volatility and change.
Apple Wields Immense Power
You only need to look at the 70% decline in the share price of Imagination Technologies Group Plc — which trades on the London Stock Exchange and generates half its annual revenue from Apple — to understand the kind of power Apple wields with suppliers around the world.
Apple is bringing the design of the graphics processor chip for its iPhones in-house within the next two years, leaving its supplier scrambling to replace the estimated $75 million in annual revenue it stands to lose once their arrangement with AAPL ends.
Apple doesn’t make this move unless it feels it can do a better job designing the processor internally while also saving money bringing the work in-house.
InvestorPlace contributor Vince Martin recently reminded owners of AAPL stock that its non-iPhone business has been “bizarrely” stagnant in the past five years, generating between $77.8 billion on the low side in 2012 and $80.6 billion on the high side in 2014, never diverging from this tight range.
He views this as a problem because it puts too much pressure on Apple to continue growing its iPhone business.
However, as a glass-half-full person, I see it as a positive. While Apple has been busy selling arguably “the most successful consumer product of all-time (Vince’s words, not mine),” it has been able to keep the other parts of its business from completely falling away.
Services Business: Yea or Nay
I recently wrote about why Apple stock is still a value play, citing its Services business as a big reason the stock price keeps moving higher. In Q1 2017, Services accounted for 9% of Apple’s overall revenue, growing 18% year-over-year to $7.2 billion, or almost $29 billion on an annual basis.
Apple might have had a few misses with its services business — they couldn’t convince me to maintain a monthly Apple Music subscription after my free three-month trial — but that happens in any successful venture. Heck, you get hits in three out of every 10 batting appearances and you’re a potential Hall-of-Famer.
I see Apple’s Services business just as Jim Cramer does — as recurring revenue, much like the Gillette model, where Services becomes even more important to the bottom line than iPhones.
For me, Services is a big thumbs-up.
Dividends and Share Repurchases Will Only Get AAPL Stock So Far
Over the past five years, Microsoft Corporation (NASDAQ:MSFT) has repurchased $19.3 billion of its MSFT stock and paid out $14.3 billion in dividends.
While it’s easy to suggest that these two levers of capital allocation are the reason why shares have achieved a five-year annual total return of 17.5% — 429 basis points higher than the S&P 500 — I think that vastly undervalues CEO Satya Natella’s moves to transition Microsoft from the PC to the cloud.
So, in my opinion, no matter what Trump does to allow companies like Apple to repatriate overseas cash — which could lead to increased dividends and share repurchases — ultimately, you want to own AAPL stock because of what’s going to happen in the future from a business perspective, and not because of changes in the dividend.
If you’re buying Apple stock exclusively for the dividends and/or share repurchases, you probably want to look elsewhere.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
