Last month, Apple (AAPL) seemed a good buy because its yield was attracting income buyers (Apple: Analytical Shift Makes Stock A Buy). Now, not only is the yield still attractive, but Apple's investor antipathy and diminished growth expectations are added reasons to buy - i.e., to be optimistic about AAPL as a stock investment.
(As a "bonus," we are getting today's (Wednesday) price drop because of the news about e-book pricing. More about that at the end of this write-up.)
First, let's update the yield picture. Then we can look at investor attitudes and the company's growth outlook.
Apple's yield: Even better than before
When I last wrote, Apple's annual dividend was $10.60 per share. Shortly after that, Tim Cook announced earnings and an increase in the dividend to $12.20 per share. That large 15% dividend increase likewise raised the stock price yield levels 15%:
These levels are important to income buyers, so they offer good support points, keeping risk in check. A safe 2+% yield with growth potential in today's market is desirable. So why is Apple's yield so high at around 2.75%? It's a dual whammy that has struck AAPL. First, the rapid shift of investor attitudes from optimistic to pessimistic. Second, the diminished growth forecasts with greater uncertainty.
Today's investor view of Apple: Undeservedly negative
In less than 12 months, investors' view of Apple has gone from being the best growth company ever to being a has-been company, now criticized on many fronts. Neither perspective is correct. Therefore, where last year's view took the stock too high, this year's has taken it too low.
This 2013 over-pessimistic attitude can also be seen as a reaction to 2012's over-optimistic one. This offsetting action/reaction pattern is common in the financial world and was made well known by Roger Babson and his Babsoncharts in the early 1900s. The effects can be seen in Apple's stock price chart:
(click to enlarge)
(Stock chart courtesy of StockCharts.com)
Last year's rapid run-up was heightened by investor euphoria. Then, as excessive expectations began to come undone, the stock returned to a more normal valuation. However, the undoing of over-optimism rarely (never?) stops at "normal." New buyers, wary of a falling stock, want a bargain. Moreover, Wall Streeters know that anxious investors hanging on for a bounce-back are likely to bail out if a stock drops further. Hence, the continued drop this year as a reaction to what went on last year.
Eventually, the excesses are unwound and the stock becomes a value that attracts new investors. Helping that along this time is Apple's new dividend.
Apple's growth forecast: How to view the future
There has been widespread criticism of Apple's secrecy about what Apple is up to, making growth forecasts unknowable. This lack of information has always been the case - it's just that investors and analysts began to feel high growth was certain in 2012. Now investors say, "Just let us know what's coming, so we can be assured that the future will be positive." That unrealistic demand (in a competitive industry, particularly an innovative one like technology) resulted from having had high expectations (up to now unfulfilled) of big things to come after Jobs died.
So, without foreknowledge, what should our outlook for Apple's growth be? The best approach is to stick to a basic checklist:
Does Apple operate in growth areas of a growth industry?
Does Apple have the organization and management to be a successful growth firm?
Does Apple have an innovative and growth culture?
Does Apple have the manufacturing processes to produce high quality products in quantity?
Does Apple have a positive brand awareness?
Does Apple have the marketing procedures and clout to introduce new products successfully?
Does Apple have the financial resources to accomplish its strategies?
Answering "yes" to these questions means Apple has what it takes to produce growth in the future. How much and from what products? Time will tell. For now, particularly with the stock having a good dividend yield, we can be satisfied - indeed, optimistic - about the company's prospects.
The bottom line
Apple is more than a stodgy dividend payer. It possesses strong growth characteristics, even as investors bemoan the lack of a clear future. In fact, simply by saying we think Apple "could" produce good future growth, we now fall into the optimistic camp.
The recent dividend increase combined with the current price drop has taken the yield even higher than it was when the stock bottomed at about $385. Therefore, the price looks desirable as an income investment alone, meaning any future growth prospects are a bonus. For that, we can be truly optimistic about Apple as an attractive long-term investment.
So what about the e-book pricing investigation and "ringleader" accusation by the Justice Department?
First off, it's been a known issue that Apple has been unwilling to settle. So, although it is finally going to court, how and when the issue will be resolved is unknown. Typically, analysts wait for the details to emerge, calculating worst case and more likely results. One key item is Apple's refusal to settle even as all the publishers did. Is the company's hard stance due to arrogance? Likely not, especially with Tim Cook as CEO. It could be that Apple has an arguably defensible position, as it says it has.