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Apple - The Rally Won't Be Over Anytime Soon

|About: Apple Inc. (AAPL)
Summary

Apple is not just a phone company anymore.

Services and Wearables, Home, and Accessories still have ample room to grow.

Dividend should grow and repurchases will raise future EPS.

Some people in the investment community had said the domination of Apple was over with when the stock hit a yearly low of $142.19 on January 3rd, but the stock has surged back and is on the cusp of all time highs yet again after delivering a stellar earnings report and enticing investors as to where the growth will be occurring next. While overall revenue is down from the year ago quarter, investors still have reasons to love the name as services, wearables, and the share repurchase program power the shares forward.

In fiscal Q2 2019, Apple was able to still beat their EPS estimate by a hefty $.10, as well as a large revenue beat, despite a 17% ($6.5 billion) drop in iPhone sales from the year ago quarter. However, Apple’s two fastest growing units are becoming more adept in picking up the slack from iPhone sales, as the Wearables, Home and Accessories segment increased its revenue by almost $1.2 billion YOY for an increase of 30.05%, while Services grew by $1.6 billion or 16.24%. The two products at the forefront of these gains are the Apple Pay and Apple Watch units, respectively. These two units are growing at phenomenal rates. For the Apple watch, growth will be accelerated as Apple continues to add health features to the watch and gets it certified as a health device by the USDA. In addition, Apple Pay will continue to roll out from the 30 countries it is available in now into more of Europe and Asia as the system is fully integrated.

The services segment of the business is an extremely interesting part of the business to take a look at, as Apple is rolling out a plethora of new products for the unit in the coming months. Apple will be expanding its Services business segment with the launch of Apple News+, Apple Arcade, and Apple TV. With 1.2 billion devices in circulation, Apple already has a large market to push these new products, and Apple will capitalize on recurring revenue with these new additions coupled with existing services such as Icloud and Apple Pay. As long as Apple continues to increase the number of devices in the market, the more prospects for Services there are. Eventually, I believe Services will overtake iPhones as the largest business segment for Apple, and it will become the most valuable revenue generator, while Mac, iPad, and iPhones not only generate large amounts of revenue but become the delivery device for Apple Services. Apple also has the luxury to offer promotions with the first month free or even the first three months free to get consumers hooked.

Apple started paying a dividend in 2012 at $0.7572 per share. The most recent dividend increase the board announced will be the seventh consecutive increase in less than seven years to $3.08 per share. This works out to $0.77 per share on a quarterly basis, which is more than the entire dividend was at inception. With an incredibly low payout ratio of under 30%, there is a runway of growth for dividend increases in the years to come. Apple's dividend may not be as large as some other companies, but they have created so much value for shareholders, the dividend is the cherry on top, which, over time, could grow to the 3% range. In addition, apple returned over $27 billion to shareholders in Q2 which retires 55.1 million shares. The Board and Senior Leadership is so confident in AAPL’s future and the value it represents that they have authorized an additional $75 billion for purchasing back shares.

Apple is the quintessential stock for this generation that generates stellar growth and generously returns dividends to their investors. Services and Home accessories and Wearables will continue to help pick some of the slack from iPhone sales, but at the end of the day a single product accounting for over 65% of the revenue of a company Apple’s size isn't sustainable in the long run. Apple should continue to run up and approach a PE ratio in the high twenties that takes into account the growth mentioned earlier. Regardless, if you purchase Apple now or in a few months, if you're looking for a long-term investment with a long track record of generating value, AAPL is your winning ticket.

Disclosure: I am/we are long AAPL.