Apple iPhone, Dividend Buzz Can Keep Stock Hot – Barron’s


With Apple’s share price once again flirting with a record high, it seems that all anyone talks about is the next big iPhone launch.

Buzz surrounding the coming 10-year anniversary iPhone is growing ever louder. Early Friday Nomura Instinet analyst Jeffrey Kvaal sweetened his price target for Apple AAPL -0.19869429463525404% Apple Inc. U.S.: Nasdaq USD140.64 -0.28 -0.19869429463525404% /Date(1490389200509-0500)/ Volume (Delayed 15m) : 21425771 AFTER HOURS USD140.43 -0.21 -0.1493174061433447% Volume (Delayed 15m) : 969792 P/E Ratio 16.84311377245509 Market Cap 739342412697.986 Dividend Yield 1.621160409556314% Rev. per Employee 1874840 More quote details and news » AAPL in Your Value Your Change Short position (ticker: AAPL) by 20% to $165 a share arguing that sales of the so-called iPhone 8 (as it is commonly called by analysts) due to debut late this year will shatter expectations and help fuel estimate-beating profit growth.

Yet high hopes for the iPhone 8 aren’t the only reason to take a bigger bite out of Apple. Let’s not forget, it is one of the few technology companies that pay a cash dividend to shareholders. RBC Capital Markets analyst Amit Daryanani forecasts that the iPhone maker is poised to announce next month plans to significantly increase the capital it returns to shareholders with a $35 billion boost to its existing share buyback plan and a 15% dividend hike.

Add that to forecasts for accelerating earnings growth, and “the fundamental reality remains that Apple’s valuations are materially subpar,” says Daryanani.

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He isn’t alone seeing Apple as a bargain. Warren Buffett’s Berkshire Hathaway (BRKA) became one of the company’s biggest shareholders late last year when it added the stock to its portfolio.

It’s not hard to see why some investors might be tempted to sell. At a recent $141.47, Apple’s share price has recovered dramatically from the selloff that marred 2015 and continued early last year, when Apple posted a full-year revenue decline for the first time in 15 years.

But as Barron’s Jack Hough noted last week, iPhones aren’t falling out of favor and Apple’s high-margin services business continues to race higher. In fact, Barron’s Next noted recently that Apple’s services business could be a $50 billion concern by 2020, and the opportunity from things like AppStore, iTunes, AppleCare and iCloud are underappreciated by investors.

The next iPhone launch is certainly a significant event. And analysts are using the terms “supercycle.” Yet much of the enthusiasm seems baked into the stock. And cautious voices on Wall Street warn that Apple needs to diversity its business.

But there is much more to the Apple story than the iPhone8. With $240 billion in cash sitting on foreign shores, Apple could get a boost from President Trump, namely a proposed tax policy that would make it cheaper for companies to repatriate offshore cash.

The “increased probability” of repatriation could get Apple’s management talking about long-term dividend payout targets, namely hiking its payout ratio. The current dividend payment totals $12 billion a year. Yet even in the absence of repatriation, Apple’s domestic free cash flow — expected at just under $22 billion this year — is more than enough to sustain a 15% dividend hike, Daryanani says.

Moreover, Apple’s net cash position has grown to $159 billion. So the board has plenty of dry powder to cover the $31 billion remaining on its existing share buyback plans and to expand it.

Granted, at 15.3 times forward earnings, Apple is trading near its highest price to earnings multiple in five years. But there is much to like including a respectable 1.6% dividend yield.

Comments? E-mail us at editors@barrons.com

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