THE HUNT FOR YIELD HAS LED INVESTORS TO APPLE
FX 360
ONE of the absolute truths of the current investment climate is that investors are desperate for yield. With both the Federal Reserve and the European Central Bank emulating the Bank of Japan by keeping rates at near zero per cent for the foreseeable future, savers have become starved for return. For example, in the US, investors can now expect to receive a whopping $12 dollars of interest on a $100,000 6-month T-bill. Put simply the rate of return on $100,000 of 6 month US Treasuries will not even pay the tab for a lunchtime hamburger at a run of the mill Manhattan eatery. For savers, many of whom depend on fixed income to supplement their retirement the current situation is nothing short of disaster.
When Fed Chairman Ben Bernanke was asked about the impact of his zero interest rate policy on savers, his response was simple and direct – investors seeking yield should look to equities not bonds for their returns. Little wonder then that dividend-yielding stocks have performed so well in the recent stock market rally as many the hunt for yield has made them the instrument of choice in the current zero interest rate environment.
Of course, dividends have always been the key ingredient to stock market performance. In fact, the only reason equities have outperformed bonds, commodities and precious metals over a long period of time has been due to the compounding factor of dividends. Over the past several decades, when stocks boomed and capital appreciation was all the rage, investors have forgotten that lesson. But now they are flocking to high dividend stocks in droves.
To illustrate the power of this phenomenon, financial blogger Reformed Broker took a look at the performance of all US equities that recently declared their first dividend. The results were astounding. Of the approximately 40 or so equity names that he tracked from 1 August 2011, only three stocks posted a negative return. Furthermore, a a group the new dividend yielding stocks outperformed the S&P 500 by a massive 15.67 per cent – appreciating by 22.75 per cent, while the index rose by 7.09 per cent over the same period of time. In the financial markets the verdict is clearly in – dividends rule and any stock that declares one is likely to rally.
Which finally brings me to Apple. Apple has been on a tear lately as investors flocked to the stock in the wake of its record breaking quarterly results. The fundamental case of the company is well known. Its products are so superior to the competition that it sometimes feels like it is playing on a completely different level. The other day at dinner with my sister, her fiancé and my children, I counted six iPhones at the table and several iPads in our briefcases. Given Apple’s recent sales numbers, I have a feeling that our household is not unique. With the iPad 3 and iPhone 5 on the way, I have no doubt that demand for its products will remain strong. Despite the consumer euphoria the Apple stock remains relatively modestly valued trading at only 14 times trailing earnings.
Yet that’s not the reason I find the stock attractive. The company is sitting on a massive pile of cash. Apple’s $97.6bn in cash and investments is larger than the market value of all but 26 companies in the Standard & Poor’s 500 index. The total could reach $150bn by year-end if the company doesn’t give money back to shareholders, according to many companies that follow the company. If Apple were to announce its first dividend it would join that exalted club of dividend paying stocks and would very likely rally further as yield seeking investors pile into the stock. Furthermore, as the company’s business continues to grow it will very likely increase its dividend in the near future, prompting further appreciation in the common stock.
CFD traders can approach the trade two ways. They can take a more speculative stance and assume a position now in the hope that the company announces a dividend soon. Or they can wait until Apple actually announces its dividend plans and take a position in the aftermath of the press release trying to ride the positive price momentum that will likely be unleashed by the news. Either way the desperate hunt for yield and the massive pile of cash on its balance sheet will likely result in a winning combination for Apple stock.