Lately, it seems that there are two extreme views on Apple (NASDAQ:AAPL) going around, and that we are being encouraged to gravitate to one or the other, rather than seeking out middle ground.
You've got one set of people who fully expect that the company's stratospheric growth rate of the last decade is replicable in the years ahead (the "permabulls") and the other set who would seem to believe that the company, lacking Steve Jobs (and probably with him, when he was still alive) is on the verge of a major crash and burn. As an investor in Apple, I don't think that either outcome is likely, and am honestly more intrigued about the implications its present and future cash flows would have on its (about to begin) dividend stream than anything else.
The bull case consists of the hope that Apple continues to hit the ball out of the park as they extend from current product lineup to intertwine more deeply in our lives, the much rumored iTV being the latest hope for such a result. Do that, they reason, and earnings will become even greater, dragging the stock price up even more and hopefully triggering an expansion of the earnings multiple they trade at.
Meanwhile, the most extensive bear case I've read posits that Apple, without its founder, will quickly lose focus, stumble and be overtaken by swarms of Android devices, and we thank our lucky stars for having bought in the first place and sell as quickly as possible before that fate befalls us.
The Middle Ground is Good Enough.
Personally, I don't think either case is likely. I'll agree, Apple's best days of innovation are likely behind it. That's what happens when you lose a visionary - there's simply no replacing Steve Jobs. But the business he left behind has legs under it that can likely run for decades supposing that they follow one simple rule: don't mess up.
Simply - their future is not dependent on coming up with new ideas, as a recent contributor recently opined. As long as they can provide incrementally better products, they've got an installed base that's big enough to carry them forward for years, if not decades.
Through Apple stock looks cheap from an earnings perspective, its continued growth is essentially held hostage to the rest of the stock market. Nearly every buyer that want to own it already owns it, and many buyers (diversified mutual funds, pension plans and the like) have strict percentage limits on their exposures to any single company, which means that Apple's stock price cannot grow much from here without the rest of the market rising as well. To grow much larger would simply trigger forced selling from the institutional buyers.
But in light of Apple's announced dividend policy, that will matter less and less. Their dividend, and the accompanying buyback announced on the same day, will consume approximately $15 billion per year, out of the $40 to $45 billion they will likely earn this year alone. Piling that on top of their huge reserve of cash and investments, it's clear that there is plenty of room to grow the dividend over time, again, so long as they don't mess up.
The installed base is a cash cow of its own.
There is a larger installed base of Mac users than there ever has been before in the past, and along with that installed base is a huge investment in software. Just as the installed base of Microsoft Office has ensured Microsoft's dominance in the business world, the installed base of software on Apple hardware ensures that there will be future buyers as Apple refreshes their hardware.
Apple could just let Sir Jony Ive continue to make new case designs and then, riding Intel's coattails, continue to stuff the latest and greatest processors and chipsets inside of them. But Apple's already shown they're not content to do that - Retina displays are on their way. The already announced MacBook is first, obviously, I'm sure the MacBook Air won't be far behind... The iMac will have to wait until the process is refined enough to create 27 inch Retina displays, but this shows that even though they could rest on their laurels and push out incremental upgrades, focusing on not messing up, Apple has shown that they are determined to continue to push ahead of the commodity laptop world.
Likewise, the iTunes Store, pared with iCloud, has created a fantastic lock-in for current owners of iPods, iPhones and iPads. Moving to an Android device would mean downloading equivalent apps for it and re-purchasing apps that they had already bought the iOS version of. Likewise, it would mean abandoning a huge investment in movies and TV shows that had already been purchased, and no longer being able to stream their music collection from Apple's servers to their Android device.
Even if Apple's future hardware refreshes are less than dazzling (such as the incremental upgrade from the iPhone 4 to the 4s), there is a huge installed base that will find that way forward is much easier if they continue to upgrade to Apples latest hardware when their cell phone contract renews, than to abandon all that they have stored on Apples servers in favor of moving to Android. Again, so long as Apple can deliver an incrementally better iPhone every 2 years, they will continue to benefit from customer upgrades.
Lets not worry about growth, it's about the dividend now.
To me, the likelihood that Apple hits $2000 a share is just as scant as it falling to $250 a share, and even a push to $800 might be difficult regardless of how strong their own fundamentals are, until the current market uncertainties get resolved.
One thing that seems to be a given in my eyes is that now that they are committed to paying cash to shareholders, they will be in a position to rapidly increase the amount that they can pay out, so long as they don't mess up. They can have a positively rosy future without a TV hybrid or whatever else the rumor sites fixate on - they just have to continue executing with the set of products they already have.
So long as they can do that, we'll be looking back one day soon remembering when Apple's quarterly dividend was "only" $2.65 per share.
(I can't help but to think that if Warren Buffett felt more comfortable investing in tech, he would recognize the moats that Apple has built and be a buyer - except such a move might spoil his friendship with Bill Gates!
My opinion. Do your own due diligence.
Disclosure: I am long AAPL.