Skip to content

Even Apple is Human, Redux

May 8, 2014

Two years ago on May 8, 2012, my blog was titled Even Apple is Human.  The point of the blog was that the ultimate test of a stock’s value is earnings and dividends.  I used Apple as an example of a high-flying stock that eventually will only be priced based on those two criteria.

Two weeks ago, after Apple announced a substantial stock buyback and dividend increase, the stock jumped in value.  Not in response to expected new products but because of the dividend payout, buy-back and stable earnings growth prospects.  Three articles in the following Barron’s repeated this and could have been copied from my blog two years earlier when Apple was expected to go to $1000.

In some instances, stocks sell for substantially greater prices than indicated by earnings and profits because of expected growth, but sooner or later it catches up.  I am not telling you to ignore those companies, but I am saying that if you want to build a secure future, then you need a diversified portfolio that includes stocks that are priced right with a reasonable dividend payout and expectations of steady earnings growth.

Stock buybacks are not dividends but are a way of returning cash to stockholders… not to the stockholders selling but the ones standing pat.  Any buyback is an indication that the Company’s board believes the stock is underpriced and their return on investment would be better than by investing in its internal growth or in other forms of investments.  In Apple’s case, they seem to have so much cash that their capital needs are well-met by what remains after the dividend payment and stock buyback.  I heard a Warren Buffett interview where he said that he likes stock buybacks because that increases his percentage of that Company’s ownership.  For us mere mortals, it means that the earnings per share will increase just by the overall Company earnings remaining stable and that should reflect itself in an eventual higher stock price.  Also, the Company will pay less cash in dividends because fewer shares are outstanding further providing more cash to increase dividends going forward.

My 2012 article also said that if earnings and dividends were the real drivers, then an index fund might be a better alternative than a basket of stocks individually chosen by the investor.  You can reread that blog.  Nothing has changed since it was written.

Apple also announced a stock split, but that doesn’t really affect the value of the Company.  It might make it more attractive for someone to say they own “100 shares” instead of 15 shares, and some immediate bump up in people buying shares, but the overall value stays the same.  In Apple’s case, a lower priced stock might make it a candidate for inclusion in the DJIA but that, too, should not have much long-term effect.  So, the three Barron’s writers didn’t discuss the split too much.

Ain’t investing fun!

One Comment leave one →
  1. Robert Nagler permalink
    May 11, 2014 4:49 am

    hi ed lets buy apple

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: