Apple Shares Extend Slide As 'Bond Like' Cash Flows Feel Inflation Heat

Apple's steady, fixed-income like cash flows have shares in the world's biggest tech company trading like a bond this week, falling in line with Treasury prices to the lowest levels in more than a month.
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Apple Inc.  (AAPL) - Get Report shares slumped lower Thursday, extending their recent decline to a six-week low, as bond markets continue to price in faster inflation and higher interest rates that have it cash-rich tech stocks in markets around the world. 

Apple's titanic cash position -- fortified earlier this month with a $14 billion bond sale at rock-bottom interest rates -- and free cash flow generation gives the world's most valuable tech company a peculiar characteristic: it can sometimes trade like a bond.

Bond investors are notoriously skittish about rising inflation, as it erodes the value of fixed future payments. Collectively, that lowers the price of an asset -- like a Treasury bond -- that is reliant on a steady stream of cash flows over a long period of time.

In many ways, that describes Apple. It generated $73.65 billion in free cash flow over its 2020 fiscal year, a 24.5% increase from 2019, and added a further $35.37 billion over the three months ending in December. 

Apple's share of the global smartphone market is shrinking in favor of cheaper, Asia-built rivals, but its installed base of 1.65 billion units, and a predicted 5-G related upgrade cycle pins its near-term value more on cash flow -- and shareholder returns -- than growth. 

And this might be why the stock has lead tech sector declines over the past week as benchmark 10-year Treasury bond yields hit a 13-month high of 1.33% and inflation signals from Beijing to Boston have increased bets on higher market interest rates and fading central bank support.

Stronger-than-expected readings for factory output and retail sales yesterday, the latter of which was powered by December's $900 billion stimulus bill, alongside a big jump in producer prices has investors worried about faster inflation as the economy begins to escape the COIVD pandemic's grip.

Inflation-protected bonds are indicating a CPI rate of 2.246%, the highest in nearly seven years, and the gap between 2-year and 10-year note yields is sitting at the steepest since early 2017 as Congress fine-tunes President Joe Biden's relief effort that will add another $1.9 trillion to the already-improving economy.

Apple shares were marked 2.44% lower in early trading Thursday to change hands at $127.65, the lowest since January 6 and a move that extends its three-day decline to past 5.5%. 

Apple's pledge to get to what it calls a "net cash neutral position over time" only adds to its share price sensitivity to interest rate changes. The group's dividend payout ratio last year was 21.8%, well below its peer-group average of 31.1%, and its current dividend yield is a paltry (but incredibly stable) 0.62%.

In order to get to 'net cash neutral' -- meaning total cash minus total debt comes to 0 -- Apple will likely need to increase its shareholder returns through dividends or buybacks, adding to its 'bond like' cash stream that could add downward pressure to its share price if market interest rates, or inflation expectations, continue to rise.

Still, it's also worth nothing that Apple trades at around 31 times its forward earnings estimates, and its earnings yield is 2.77%, firmly north of the 2.09% yield found on 30-year Treasury bonds. 

Apple is also weaning itself from a reliance on iPhone sales, with wearables and services revenues rising at double-digit rates -- the latter hitting a record $15.8 billion over the December quarter -- with gross and operating profit margins expected to rise sequentially over the next two years. 

Shorter-term investors, however, will need to keep a close eye on bond markets for the few months.