Why Apple is My No. 1 Income Stock
Many investors think in binary terms, like the tendency to distinguish between value and growth investing.
While value investors focus on companies with low valuations — whether based on the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio or something similar — growth investors focus on earnings growth, expecting share price to follow profits higher.
There are many studies showing specific valuation tools can work — if we define working as delivering market-beating results, and if the time horizon is long enough. In other words, value investing often means being patient through years of underperformance — a time horizon many growth investors don’t share.
But growth investing has its own caveats. For instance, a stock’s price can fall as quickly as it rose if a company’s growth slows or if a competitor bursts onto the scene.
Despite the seemingly stark contrast between value and growth investing, I tend to blur the lines between the two disciplines.
For instance, I often use the PEG ratio, which combines a company’s P/E ratio and its earnings per share (EPS) growth rate. The PEG ratio recognizes that companies growing earnings more rapidly should command a higher P/E multiple.
The line between growth and value can also be blurred when we talk about individual companies.
Take Microsoft (NASDAQ: MSFT), for example. On the chart below, we can see it transforming from a growth stock sporting a high P/E ratio (blue line) to a value stock sporting a lower one.
Now MSFT would be best described as an income stock, and investors who spotted this transition have done well. Since the company began paying a dividend in 2003, its stock price has roughly doubled while the total return, which includes dividends, is more than 150%.
In the current market environment, Apple (NASDAQ: AAPL) seems to be experiencing a similar transition. Below we can see its declining P/E ratio, and the tech giant recently began paying a dividend.
Because many investors take a binary view of the markets, they are debating whether Apple should be considered a growth stock or a value stock at this juncture. But I believe it should now be considered an income stock.
Apple’s products are a part of everyday life for hundreds of millions of people around the world, and the company is still growing at an impressive clip. The tech giant reported revenue growth of nearly 28% to $233.7 billion in fiscal 2015, which ended in September. Earnings soared 43% to $9.22 per diluted share.
Yet, investors seem to panic at any mention of slowing growth, especially with regards to iPhone sales.
Apple has sold more than 800 million iPhones since the product was introduced in 2007, but the truth is, growth is slowing. Looking at the chart below, we see the Android operating system displaced Apple’s iOS as the most popular mobile operating system in mid-2014.
Data provided by Net Applications.
But Apple still holds about 35% of the market, which is nothing to sneeze at, especially since no other competitors currently come close.
Apple is scheduled to report fiscal first-quarter earnings on Jan. 26. Analysts expect year-over-year revenue growth of 2.8% to $76.7 billion and 5.6% EPS growth to $3.23. Apple has beaten the consensus estimate in each of the past five quarters.
While growth is indeed slowing, analysts expect earnings growth to average 12% a year over the next five years. For fiscal 2016, analysts’ estimate EPS of $9.51. Based on the PEG ratio, shares are worth at least $114, which means they currently are about 11% undervalued.
The PEG ratio is one of my favorite objective measures of value. But investors aren’t always objective — especially when a company begins to blur the line between growth and value.
In addition to offering solid growth and value, Apple boasts a massive cash hoard.
This summer, Apple became the first corporation ever to have more than $200 billion on its balance sheet. As some analysts noted, much of the cash is overseas and the company could face large tax bills. But even taking that into consideration, the company’s cash on hand exceeds the market cap of the vast majority of publically traded companies in the United States.
Apple currently pays an annual dividend of $2.08 per share. This adds up to about $11.5 billion for all outstanding shares, which is less than 5% of the company’s revenue. And the payout ratio — the proportion of earnings paid out as dividends to shareholders — sits at 21.5%, leaving plenty of room for increases.
But income investors don’t need to rely solely on dividends…
Double Apple’s Payout in Minutes
Last week, I recommended traders buy Apple and told them how they could generate an additional $4.15 a share in income. That’s almost twice as much as Apple’s yearly payout in one shot. And the money was deposited directly into our accounts and is ours to keep no matter what — just like a dividend.
There’s no such thing as a free lunch though, so there must be a catch, right?
There is: In return for that substantial income payment, we agreed to sell our shares for $100 apiece if they close anywhere above that price on Feb. 19.
Allow me to take a step back. When we initiated this trade, AAPL was trading at $99.96. So that $4.15 in income lowered our cost basis on the stock to $95.81, meaning shares could fall more than 4% before we’d experience a loss.
And if AAPL is trading above $100 in mid-February, we’ll sell our shares for $100 apiece, booking a 4.4% return. That may not sound like much, but considering the trade will be open for less than six weeks, it works out to an annualized rate of return of 42%.
If shares close below $100 on Feb. 19, we’ll keep them and our $4.15 a share, and we’ll have the chance to bring in more income with a similar trade.
Perhaps you are familiar with this strategy, which is known as selling covered calls. It involves options, but it is one of the simplest and most conservative income strategies available to investors. And you can use it with almost any stock in your portfolio to generate extra income.
With 2016 looking like it could be a tough year for the markets, investors need every extra cent they can get. By selling covered calls, you could pocket an extra $3,000 a month.
I’ve put together a short presentation on how to do just that. I explain the strategy step by step, so even if you’ve never traded an option a day in your life, you will be able to get started right away.
I’ll also share how you can generate hundreds of dollars in the next 48 hours — from stocks you already own. It only takes 90 seconds. Click here to watch.