Apple (NASDAQ:AAPL) hasn't been acting like itself lately. The stock has been on a tear for the last couple of weeks, handily besting the S&P 500 almost every single trading day. This by itself isn't strange - Apple's old hands are used to consistent outperformance by now. What is strange is that this large updraft is coming on the heels of the company's latest earnings release, which already propelled the stock up over 6% on the day of the announcement.
Apple's movement around earnings day has been somewhat predictable in the past. The stock would usually begin a slow crawl upwards shortly before earnings as the market begins to accumulate shares in anticipation of estimate-beating numbers. Apple would then proceed to report another quarter of blockbuster results, which would ignite the stock's jet pack and send it shooting up the same day, with the momentum carrying it a bit further over the next week or so. Then the stock would settle as it breaks into its new 52 week high, maybe pull back a bit, and remain relatively stable until next quarter's report, where Apple would smash expectations once again. Rinse and repeat.
This time has been different. The first two stages were the same: slow crawl before earnings, then an earnings-driven spike to new heights. But Apple didn't stop for a breather this time. Despite respected analysts like Seeking Alpha's own Jason Schwarz calling for a short-term pullback in the stock at $450, Apple continued its breakneck ascent, closing yesterday at $493. What's going on?
Let's start with a disclaimer: the stock market is an infinitely complex machine with far too many moving parts to count, and anyone who tells you that they know for sure why a stock is moving a certain way is probably going to try to sell you some snake oil, or maybe a bridge next. But we can generate ideas, make educated guesses, and form hypotheses. My best guess for Apple's unprecedented post-earnings scramble is this: Apple's next shareholder meeting is coming up on February 23rd, the stock's biggest investors are expecting the company to announce a dividend at last, and they're buying, buying, buying.
As Apple's cash hoard balloons to vast new dimensions after every blockbuster quarter, the news wires have been buzzing with articles either calling for an Apple dividend, predicting an Apple dividend, or both. However, as of the latest quarter, we're finally beginning to see some real, tangible evidence that a dividend is on its way, and it may come a lot sooner than expected. The first exhibit is a statement from Apple CFO Peter Oppenheimer on the latest earnings conference call, where he tantalized investors by saying that Apple is "actively discussing uses of our cash balance" and that "we ... are not letting it burn a hole in our pockets." Now, Adam Lashinsky, Fortune's go-to expert on all things Apple, is citing a report from UBS's wealth management group, which revealed that Apple's top brass has been consulting with large stakeholders on the possibility of an upcoming dividend.
Apple's stock is on the rise. Someone is buying. Who better than the same institutional investors who are actively discussing the subject of the company's first dividend since Steve Jobs's fateful return in 1997?
Make no mistake: today's Apple is Tim Cook's Apple, and Cook is an operations man to the bone. His disdain for inventory is famous - it's why Apple is one of the rare blue chips with a negative cash conversion cycle. Cash on the books is a lot like inventory in a way. It will just sit there and depreciate in value if you don't deploy it. Initiating Apple's first dividend in more than a decade is a move that is true to form for Apple's new CEO, a man who is known for his ruthless operational efficiency and hatred of wasteful practices.
What will a dividend do for Apple? Clearly the smart money believes that it'll be a boon for the stock, otherwise they wouldn't be buying in anticipation of the expected announcement. However, a lot of dividend critics claim that they don't want to see an Apple dividend. These investors cite Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) as examples of technology companies that have been returning shareholder profit through dividends and buybacks for years, yet saw significant destruction and decay of shareholder value through an immobile stock price (in Microsoft's case) or an outright collapse in market value (in Cisco's case). However, the underperformance of these two companies had nothing to do with their dividends. Indeed, Microsoft has actually been a model business for the past decade, growing EPS at a healthy, consistent, and sustainable pace year after year. The reason these two stocks have been stuck in stasis for so long was not because of their cash management policies, but because they had been saddled with gargantuan valuations. Microsoft's P/E peaked at a high of 70 in 2000, and Cisco's reached a staggering 200. One glance at Apple's financial rundown will reveal that it isn't shouldering the same burden.
Initiating an Apple dividend will instantly open the stock to a large number of institutional investors who manage dividend-only funds. These funds have sat by in the sidelines watching Apple's meteoric rise without being able to do a thing, because their policies prohibit positions in any zero yield equities. An Apple dividend will immediately give these fund managers the green light to get in on a piece of the action, flooding the market with a brand new class of investors eager to participate in Apple's success.
Dividend fund managers aren't the only ones who are paying attention. Ever since the financial crisis, and the ensuing collapse of long-term interest rates, dividend stocks have been growing in popularity with each passing year, as many income investors begin to look towards equities for yield as an alternative to bonds. Dividend champions like Altria (NYSE:MO) and AT&T (NYSE:T) that have raised their dividends for many consecutive years have been especially favored. Compared to the S&P 500's average annual trailing P/E of 14.66, Altria clocks in at 17.87 and AT&T at 45.44. Both of these valuations are especially impressive considering that Altria paid out 96% of its earnings last year and AT&T a whopping 261% (though the trailing year was an anomaly, AT&T's payout ratio usually hovers around 70%). Companies that pay out a large percentage of their profits generally carry modest valuations due to lower expected growth, which shows just how in demand dependable dividend stocks are right now. The S&P has pulled in 2% in capital gains over the past year. In the meantime, Altria has grown by 20%, and AT&T by 7% - and that's before dividends. Both companies have a yield closing in on 6%, versus barely 2% for the index. There's no question about it: dividend stocks are in vogue right now. Seeking Alpha even offers its own exclusive Investing for Income section, where quite a few community members have said that while they admire Apple as a company, they will not invest until they see a dividend coming out of Cupertino.
They may not have to wait long. All signs converge to the conclusion that an Apple dividend is on its way. The stock's recent uptrend is no coincidence - the smart money is snapping up shares left and right to prepare for the announcement that they believe is coming, an announcement that will open Apple's floodgates to an absolutely massive influx of new investors. If Apple is going to initiate a dividend, now is the opportune moment, while the bulls are in control and the market is in the grip of dividend fever. Long time Apple investors know that the company doesn't need a dividend to make money for shareholders - one would be hard-pressed to find a better custodian of shareholder capital in the past decade than Apple, which has returned over 3000%. A dividend is just the cherry on top that makes an excellent pick even better.
Disclosure: I am long AAPL.