Apple(AAPL) - Get Report stock remains a bargain-priced dividend stock, even after its 12% rally this week on excitement over the iPhone 7. Apple currently has a 2.0% dividend yield, compelling growth prospects, and a low price-to-earnings ratio of just 13.4.
The iPhone 7 went on sale at the company's stores Friday morning, and early indications are that the long-awaited device is a success. Apple said Wednesday that initial quantities of the iPhone 7 Plus and the iPhone 7 in jet back had sold out during the online pre-order period and wouldn't be available for walk-in customers.
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Investors are right to get excited about strong iPhone sales, because iPhones are a big deal for Apple. They were responsible for 66% of the company's revenue in its 2015 fiscal year. The company has other devices that generate significant revenue, but the iPhone remains its single most important product.
Apple generates more profits than any other corporation in the world. The company has seen many savvy investors buy in over the last year, including Berkshire Hathaway(BRK.A) - Get Report(BRK.B) - Get Report CEO Warren Buffett. Apple is one of the Oracle of Omaha's 20 highest-yielding dividend stocks.
Let's look in more detail at why Apple shares are a buy for income investors.
Growth in New Markets
Apple is one of the most successful companies of all time, but lately it has seen a significant slowdown. Apple's revenue and net income declined 7.3% and 13%, respectively, in the first three quarters of fiscal 2016 from the year-earlier period.
During the first three quarters of this fiscal year, however, the company faced difficult year-over-year comparisons because of the success of the iPhone 6 in fiscal 2015. Without a new iPhone device earlier this year, Apple's sales were bound to decline, given the importance of the iPhone to Apple's bottom line. Indeed, Apple's iPhone revenue fell 23% last quarter from the year-earlier quarter, and iPhone units sold fell 15%.
The iPhone 7 will be important for Apple because it will allow the company to continue its push into emerging markets such as China and India. China had a population of 1.357 in 2013, while India's was 1.252 billion. Both nations have expanding middle classes. The potential for Apple in these markets is huge.
Apple has a market share in India of about 3% or less. The consumer in India is very cost-conscious, and that's why Apple's decision to release the iPhone SE was important for its sales in India. The iPhone SE is a lower-cost device.
Apple also could use a boost in China. The company grew sales in its "Greater China" region (which encompasses mainland China, Taiwan and Hong Kong) by 84% last fiscal year, which vaulted China to become Apple's second-largest geographic region. Unfortunately, due to the saturation of the iPhone 6 models, sales in China fell 33% last quarter, on a year-over-year basis.
A new iPhone is just the catalyst Apple needs to get growth going again, both in the U.S. and internationally.
This is why investors are buying Apple stock. Expectations are high that the new iPhone will be a major growth driver, and Apple's recent comments about the pre-orders are highly encouraging.
Pre-Order Results Are Encouraging
Apple said it sold out of the iPhone 7 Plus model during the pre-order period. This suggests consumers are excited about the next iPhone.
It is also promising because the iPhone 7 is a brand-new iPhone, and not just a minor modification of an existing model. A new "whole number" iPhone is likely to generate much more interest. And, the new iPhone 7 will carry significant improvements from the previous model that are likely to excite consumers. Among the new features of the iPhone 7 are better cameras, an improved processor to boost speed and performance and a stronger battery.
What investors should keep in mind is that not only will the iPhone 7 drive hardware sales for Apple, but the company will likely benefit from growth of software and services as well. This is the amazing power of Apple's ecosystem and massive installed user base.
Even in a year with no new iPhone, Apple has reaped excellent growth from software and services. For example, revenue from Apple's services business increased 19% last quarter, and hit a record $6 billion.
This was due in large part to the App Store, which had record revenue last quarter. Total services revenue exceeded $23 billion over the trailing four quarters.
Margins of Safety
Apple screens very favorably for value and income investors, because the stock offers significant margins of safety, which can help protect investors against downside risk.
First, Apple has a tremendous balance sheet that is loaded with cash. The company ended last quarter with $231 billion in cash, short-term marketable securities and long-term investments. This is compared with $69 billion of long term debt.
With so much cash, Apple easily has the financial flexibility to invest in future growth opportunities to increase growth in the business. Or, it can return cash to shareholders and pay a compelling dividend.
Apple repurchased $24 billion of its own stock over the first three quarters of the fiscal year, and paid another $9 billion of dividends in that time. The stock has a 2.0% dividend yield, and Apple has stated its intention to raise the dividend by 10% each year going forward.
Lastly, Apple stock is still cheap. Shares are a bargain, trading for a price-to-earnings ratio of just 13.4 on a trailing basis. This is significantly cheaper than the S&P 500 index, which has P/E of about 25.
If Apple is able to return to growth thanks to the iPhone and continued growth in software and services, its earnings growth should provide significant returns at such a low valuation. Potential multiple expansion is likely if Apple can prove it can still generate earnings growth.
As a result, Apple stock fits the needs of many investors, including growth, value, and dividend investors. It seems nearly all investors have a reason to own Apple, which could explain why the stock has been rallying.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.