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  • Apple: A Dividend Growth Stock For The Next Generation 1 comment
    Feb 14, 2013 2:59 PM | about stocks: MSFT, GOOG, AAPL

    Apple (NASDAQ:AAPL), under Steve Jobs, was a great growth story. In 10 years, the stock rose from just $20 a share, to its peak of $705 (although this was after the passing of Steve Jobs). The tremendous run up could be attributed to a number of things, but the first and foremost was innovation. The products being developed and released by Apple during that period of time were more innovative, more user friendly, and more fun than competitive devices being produced. The iPod was the first big product on the market that led to Apple's competitive advantage. When first released, the iPod was competing with several other MP3 players including the Microsoft (NASDAQ:MSFT) Zune. The iPod clearly won out and continued evolving to the iPod touch, which was a precursor to the iPhone and smartphones as a whole.

    In all, Apple products were seen as cutting edge and innovative. The company built a brand with extreme loyalty from their customers who would stand in line to get latest and greatest new product. Product releases from Apple were more than just an announcement; they were orchestrated events, and Steve Jobs was the conductor. The company was seen as the innovative, cutting edge brand that you absolutely had to have.

    Over the past few years, other companies and their products have caught up to Apple. Android (NASDAQ:GOOG) phones have surpassed iPhones for total ownership, although these are comprised of multiple devices, and smartphones from other brands like Samsung (OTC:SSNLF) are seen as at least equivalents to the iPhone. The iPad is the leader tablet devices, but faces increased competition nearly every day with devices from Google, Microsoft, and many more coming to market.

    For Apple, in the post Steve Jobs era, the challenge is to evolve. Apple was Steve Jobs' company, and represented him. Now it is time for CEO Tim Cook to seize control of the company and steer the ship in the direction it needs to go for the next 10 years. He initiated this effort last year when first declaring a dividend, and by developing a sound dividend policy he can turn AAPL into the ideal dividend growth stock for the next 10 years.

    At the end of 2012, Apple had nearly $40 billion dollars in cash on the books, and no debt. The company has grown EPS by 60% over the past five years, and although this is expected to slow, over the next five years Apple expects EPS growth of nearly 20% annually. In the past 12 months, the company earned more than $44/share, while paying out a $10.60 annualized dividend. At the current price of $467, the stock yields 2.2% and is paying out 24% of earnings as dividends.

    If the company were to increase the dividend at the same rate earnings are to grow, in five years, that $10.60 annual dividend would grow to more than $26/share. If Apple were to hit its earnings targets, it would be fair to anticipate this kind of dividend growth, and potentially more if CEO Tim Cook sees it fit to distribute a larger share of the company's cash hoard and earnings to shareholders.

    Trading at just over 10x earnings Apple looks like a bargain at the current price, and a significant discount versus the 16.5x earnings average of the past five years. With revenue and earnings both growing, a low share count, and room to grow the dividend I look at Apple as a sound long term investment. I will be watching closely for dips and will be initiating a position at the right time.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: MSFT, GOOG, AAPL
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