It’s been about a month since Apple (NASDAQ:AAPL) started accepting the first iPhone X pre-orders. Other than a standout report of 6 million device sales over the Black Friday weekend, early sales trends have been rather tepid and AAPL stock has barely budged.
Maybe we can chalk that up to the protracted delays and long shipping times. Many analysts are now preferring to take the long view, with Piper Jaffray’s Michael Olson seeing a super-cycle kicking in in 2018, thanks to three new OLED iPhones.
The bullish expectation, though, seems to fly into the face of a number of pre-launch surveys which showed poor buying intention for Apple’s first OLED device. Lackluster monthly sales by Taiwan Semiconductor Co (NYSE:TSM), the sole supplier of the iPhone X SoC, also give investors little reason to celebrate.
AAPL Stock as a Deep Value Stock
That AAPL stock’s days as a fabulous growth machine could be over for good is a possibility that’s hard to face. But the telltale signs are all over the place — if only one cares to look. Apple itself seems to be the first to admit this harsh reality.
The company’s earnings growth has remained subdued ever since earnings peaked at $51 billion in mid-2015. But far worse is the fact that Apple appears to have conceded that it cannot figure out a way to invest its mountains of cash and generate substantial shareholder value. You can see this by looking at the company’s earnings from 2013.
The iPhone maker earned a cumulative $184 billion from June 2013-June 2017. Apple then spent almost precisely the same amount on dividends and buybacks over that period — $185.3 billion to be precise. That’s more or less an admission by the company that it cannot find other, more profitable places to invest its earnings.
Sure, Apple has been plonking more cash into research trying to find the next big thing, with its R&D budget having doubled over the period to the current $12 billion and the company has products such as Apple Watch and HomePods to show for its troubles. None, though, appears to be on a trajectory that suggests it could one day become a worthy replacement for legacy products such as the iPhone.
Even with the benefit of iPhone 8 and iPhone X sales, Apple’s top line is expected to grow a rather modest 12% during the fourth quarter. This explains why AAPL sports a price-earning ratio of 18.6, lower than the S&P 500 average of 20.
Learning From IBM — Dividend Is King
Luckily, Apple has a longtime ally that has walked down this road. I’m talking about Big Blue, a company that has managed to survive one of the worst revenue tailspins in recent memory. Other than a few odd quarters, Apple’s growth has remained in positive territory. In sharp contrast, International Business Machines (NYSE:IBM) has seen its top line slip for 23 straight quarters. Yet, through it all, IBM has not only continued paying out a dividend, but has consistently increased it. In fact, IBM has increased the dividend for 21 consecutive quarters over the last six years, despite its earnings being cut in half. And, most of those were double-digit increases, though IBM has also been guilty of engaging in financial engineering including copious buybacks to prop up a wilting bottom line. IBM stock now sports a near-4% yield.
It appears that IBM understands something that many tech companies tend to ignore — that dividends are the real driver of long-term stock returns. Morningstar has published this Dividend Drill that affirms what the authors of Triumph of the Optimists claim:
Total Return for Growing Perpetuity = Yield + Growth
Bottom Line on AAPL Stock
Luckily for AAPL stock investors, Apple passes the dividend drill with flying colors. AAPL stock currently sports a 1.5% yield and has been growing the dividend by about 10% annually. As things stand now, Apple’s total return in perpetuity is a solid 11.5% — way better than the 2.3% yield on a 10-year Treasury Note.
But even better is the fact that the higher margin by the iPhone X will likely support strong bottom line growth for a couple of years. Throw in a low payout ratio of just 30% and Apple can comfortably continue growing the dividend for years to come.
Apple investors can only hope that the company borrows a leaf from IBM and keeps the dividend flowing through thick and thin.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.