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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Apple & Dividend Payers

February 28th 2013 Apple
Nasdaq Symbol: AAPL
Industry: smartphones
Price as of 2/28: $441.40

After a nice run up in the month of January, the month of February has been rather quiet closing up 1% for the major averages. A couple down days the last several weeks produced a nice surge yesterday pushing the Dow closer to an all time high. Plenty of sectors are outperforming the major averages like healthcare, energy, and consumer staples. Materials are one of the few sectors not to participate so far in 2013. Outside the equity space, most bond funds are not participating as well. Bonds and bond funds will have a tough time repeating their stellar performance the last 10, 20, and 30 years. The great bond bear market may be upon us. Luckily, we focus on equities. The governments sequester at the end of the month has become a nonevent. Next month's possible government shutdown should be a bigger issue, but that seems like light-years away. Having said that, its' getting tougher to find good value at least in the short term. One of the biggest themes the last several years and for years to come is dividends. As investors lose money in bond funds, they will ultimately shift more money to income generating blue chip stocks that not only provide better yields, but also capital appreciation as well.
Every major sector has great dividend stocks. The whole utility space yields 4% but trades for an above average market multiple. In the telecom space Verizon, AT&T, and Vodafone yield over 4% with an above market multiple as well. The consumer staples have perked up as many investors are growing nervous. Phillip Morris, Kraft, and Altria yield over 4%. The Healthcare space has plenty of stocks yielding over 3% with Pfizer, Merck, and Bristol Myers yielding 4%. In the energy space, two stand outs. Foreign oil play, Royal Dutch Shell yields over 5% while Conoco Phillips yields 4.6%. The financial stock yields have come down as the stocks keep appreciating. However, long term the financials will continue to hike their dividends which brings us to another important fact.
Not only do you want to invest in blue chip dividend paying stocks, but also in stocks that continue to hike their dividends. In the tech space Intel with its' recent pullback yields over 4%. Microsoft and Corning yield over 3% yet have gone nowhere. The big cash cow in the tech space that initiated a dividend last year, Apple, has plenty of room to hike it even more. We were a little early featuring Apple last fall. And the stock could certainly pull back to the $400 level, but with such a great franchise and tremendous cash flow, Apple should announce initiatives to boost their dividend, buy back their stock, and continue to innovate and update current products.
Currently Apple is trading for 2 times sales, 3 times book value, and 10 times earnings. The big sales and earnings growth story came to a screeching halt this year. Apple will be lucky to generate 10% sales or earnings growth this year although later in the year, business could pick up again. Until then, the stock may pull back more or remain range bound. The cash flow is amazing generating $40 billion in free cash flow or over $3 billion a month. Currently Apple yields 2.4%, but only pays out 12% of their cash in the form of a dividend. For comparison, Microsoft yields 3.4% but pays out 45% of their cash flow in the form of a dividend. Apple could hike their dividend payout to 20% increasing the yield to 4% and then use an additional 5 to 10% of their cash for a share buyback. Investors were anticipating some good news this week, but didn't receive any. But longer term, management will do the right thing which should boost the stock much higher than the current $441 range.