Apple (Nasdaq: AAPL) surprised investors who were concerned about slowing iPhone sales when it reported its fiscal Q3 earnings in late July.
While profits on the smartphone were down, Apple reported sales of 40.4 million iPhones, slightly beating projections by 400,000.
The stock is up 9.5% since the earnings announcement, which is no doubt impressive. But I believe the key to understanding and profiting from AAPL going forward is acknowledging its shift from a high-growth business model to a mature one -- and from a high-growth stock to a conservative investment.
|New Retirement Plan Lets You Schedule Payments When You Want
Retirees love this program because they see in advance exactly how much income they'll make AND exactly when they'll make it. And it's 37% safer than the stock market. Check it out here.
Unexpected growth isn't entirely out of the question. The next iPhone could exceed sales expectations, or the company might introduce a new product that revolutionizes an industry. These events have happened before, and they explain why AAPL has one of the greatest growth histories of any stock. But shareholders have already been rewarded for those historic developments. New shareholders should expect their returns will be commensurate with the company's future outlook.
The future looks good for Apple, but nothing like what investors saw in the past. After the iPhone was introduced in January 2007, the stock went on to gain more than 1,000% before peaking in 2015.
That gain is unlikely to be duplicated over the next 10 years. Conservatively, Apple is now a mature company expected to grow earnings per share (EPS) at an average of about 7.9% a year over the next five years.
It also offers a dividend yield of 2.2%, which should make it attractive to conservative income investors when economic data indicates growth is likely to be slow. In the current low-interest-rate environment, safe income stocks like AAPL should be among the most sought-after investments, and that status should provide support for shares even if the broader market sells off.
AAPL's forward annual dividend of $2.28 per share represents about a quarter of next year's expected EPS of $8.90. The current dividend yield uses less than a quarter of the company's trailing 12 months' free cash flow, which indicates management has the resources needed to increase the payment in the future. Apple has increased its dividend every year since it began paying one in 2012. Given the company's demonstrated commitment to raising its dividend, I believe future dividend increases are likely.
The steadily rising dividend can actually be interpreted as an indication that management is not expecting to deliver the kind of growth it has in the past. When management can't find great projects or acquisitions to invest in, it usually returns excess cash to shareholders through dividends or share buybacks..
Even if AAPL does introduce something with the growth potential of the iPhone, the company is still generating an extraordinary amount of cash that must be allocated. It's unlikely there are enough attractive projects for AAPL to use all its cash flow on, so the company is putting the remaining funds toward rewarding shareholders.
In the recent earnings announcement, management noted it returned more than $13 billion to investors through dividends and share repurchases in the quarter, and it still has another $73 billion left to return by March 2018 in its $250 billion capital return program.
Many of its share purchases have been made at higher prices than where Apple is currently trading. But management isn't trying to time the market and buy when AAPL is a bargain. In this case, management is simply trying to reduce the large amount of cash that builds up on its balance sheet every quarter.
I, on the other hand, am always looking for a bargain. In fact, I rarely pay full price for a stock.
I recently told traders how they could get paid for the chance to buy AAPL at a discount. You heard that right. There are traders who are willing to offer you money up front if you agree to buy shares if they happen to fall to an agreed upon level (the price you're willing to pay for the stock) before a specified date.
If shares fall to your discount level during the life of the trade, it lowers your cost basis even further. If shares don't fall to that level, then you simply pocket the money and move on to the next trade.
Using that same example and computing the returns with the correct geometric average, we realize that Investor A's average return paints a different picture.
This may sound too good to be true, but if you'd like to learn more about how to get paid to buy stocks like AAPL at a discount , I've put together an eight-minute training video that you can access for free here.