Apple Inc.: The Real Reason to Like Apple Stock (and It’s Not the iPhone)

The Real Reason to Like Apple StockI like Apple Inc. (NASDAQ:AAPL) stock a lot. I argued why Warren Buffett might be interested in the value of Apple stock right before his company revealed a $1.07-billion stake in it. Now, let me show you why Apple stock could be a big winner in the long run.

If you want to make a quick buck, Apple stock is not for you. It has provided huge capital gains for early investors. However, at this point, it might be better suited for those who want to build a solid income portfolio.

First, let’s admit that Apple is no longer a startup. Despite showing strong year-over-year improvement for the majority of the last decade, growth prospects are not as rosy for Apple as they were before.

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For instance, “iPhone” sales were posting solid double-digit gains quarter after quarter. The market had high hopes for the company and AAPL stock soared through the roof. Now, Apple’s growth is no longer explosive and its stock price has lost quite a bit of attractiveness since last summer.

More recently, the company posted its first year-over-year quarterly sales decline since 2003, and its stock plunged even more. But it’s in these situations that value starts to appear. You’d be missing a huge opportunity if you turn bearish on Apple stock right now.

If a company is no longer a growth stock, what does it become? In the case of Apple, I believe it will turn into an exceptional income stock.

Right now, Apple pays a quarterly dividend of $0.57 per share. That translates to $2.28 per share annually. At Thursday’s closing share price of $97.72, the company has an annual dividend yield of 2.33%.

The yield itself might not seem that impressive, but a look at the company’s financials tells me that the best could be yet to come.

You see, Apple earned a net income of $10.5 billion, or earnings of $1.90 per diluted share, in its most recent fiscal quarter. Analysts have already talked about the year-over-year change in earnings extensively, so I will not comment on that. Instead, I would like to point out the amount of dividends relative to Apple’s earnings.

Divide Apple’s most recent dividend of $0.57 by its earnings per share (EPS) of $1.90 and you’d see that Apple stock has a dividend payout ratio of 30%.

The ratio itself doesn’t mean much on its own, but if Apple is becoming a mature company, its current dividend payout ratio looks a bit low. In the electronics equipment industry, established companies pay out much higher portions of their earnings to investors as dividends. For some of them, the dividend payout ratio is above 70%.

Of course, Apple is not quite there yet. The company has several projects that require substantial investments and those projects could be better places to put their earnings than dividends.

However, when it finally reaches maturity, Apple’s dividends could be a lot more substantial. If its EPS stays at today’s level and the company increases its dividend payout ratio to 70%, shareholders would receive $1.33 in quarterly dividends, or $5.32 per year. If Apple stock trades at approximately $100.00 a share at that time, it would give the company a dividend yield of 5.32%. When was the last time you saw a yield like that?

Apple stock bears often argue that the company’s business will keep declining. But don’t forget that iPhone sales were lackluster in the most recent quarter because consumers were anticipating the launch of the “iPhone 7” in September.

Also, while the whole smartphone industry is slowing down, Apple’s business could pick up momentum in its services segment. In the most recent quarter, Apple’s services revenue grew by 20% year-over-year.

Oh, one more thing, Apple has more than $200 billion in cash reserves. If it wants to invest in other projects or buy a startup to fuel its growth, it has the ability to do so. At the same time, it can also use that money to return some value to shareholders, may it be in the form of dividends or buybacks.

The Bottom Line on AAPL Stock

Under Tim Cook’s leadership, Apple stock started paying dividends again in 2012. In less than four years, the company’s quarterly dividend rate has increased by more than 50%.

Dividend growth, a feature that is key to value investing, doesn’t seem to get that much attention these days. However, after all the hype, keep in mind that for a stock to be worth anything at all, it has to be able to return value to shareholders at some point in the future. For Apple stock, that future point could come soon.