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Why Apple Is Just Not a Growth Stock Anymore

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Along with revenue (up by 11%) and earnings (down year-over-year for the first time in ten years), Apple (NASDAQ: AAPL) also announced two other important things that should matter to investors: a dividend increase and expansion of its stock buyback program. The company will return a total of $100 billion to shareholders over the next three years. No minor thing.

The tech giant will raise its payout by 15% to $3.05 per share. This year, Apple will set a record by paying out the largest annual dividend by any corporation in history: $11.5 billion.

By buying back its own stock, the company will effectively reduce share count by 15% by the end of 2015. This will have an effect on the bottom line as EPS will probably increase.

A caveat here is that Apple will actually have to issue debt to pay the dividend and buy back shares. Most of its $147 billion in cash on hand is held overseas, and the company doesn't want to bring it back and pay U.S. taxes on it. However, with interest rates at historic lows, this should not cause a big problem on the balance sheet.

End of high growth

It doesn't appear Apple is acting like a growth company anymore. It looks as though it is an old-school stalwart making billions that will regularly return cash to shareholders.

Analysts will just have to get over the fact that Apple is not growing at the 50% to 70% rate that the company was able to report in the past, and new products won't be released until later this year. CEO Tim Cook says that Apple will not release a product until it is ready.

However, from the products it does have, Apple can expect a steady stream of cash coming in. Most people who currently own devices return in the future to upgrade to the latest model.

Therefore, many investors might be perfectly willing to hold shares, now trading at only eight times earnings and acting almost like a value stock that happens to yield nearly 3%. I know I will be happy collecting the juicy dividend payments every three months.

Other stalwarts

Other companies announcing dividend increases recently include the megacaps Johnson & Johnson (NYSE: JNJ) and ExxonMobil (NYSE: XOM). Both are relatively stodgy companies growing moderately with a record of regular payout increases over long periods of time. Such stocks are valuable for those needing to keep up with inflation.

ExxonMobil, the world's most valuable company, will increase its dividend for the 29th consecutive year. It will pay out $11.3 billion in 2013, slightly less than Apple, still very impressive. Even though revenue was relatively flat last year because of declining oil prices, the company should be able to continue to increase payments in the future by taking advantage of the growing natural gas market in which it is a big player. With an earnings base of over $40 billion and free cash flow of $22 billion, the company has plenty of cash to draw from.

Johnson & Johnson will increase its dividend again this year as it has done every year for half a century using a combination of innovation, acquisitions, and name recognition. Last year, it bought medical devices company Synthes in the biggest deal in its history. It also has a seemingly endless pipeline of new drugs in the works. In addition, the company owns several billion dollar brands like Band Aid and Tylenol, which will continue to generate tons of cash for years to come. Like gasoline and natural gas people need these items on a regular basis.

Conclusion

In spite of the consternation of many analysts, I, and probably many other Apple investors will be content watching the company transition from very high to moderate growth over the next few years. The company will likely keep paying out those hefty dividends and buying back shares using all that cash it generates from sales of devices that people love to buy.

Companies like ExxonMobil and Johnson & Johnson have been able to do the same thing over many years and enrich their shareholders, and maybe, now Apple would do the same.


Mark Morelli owns shares of Apple and Johnson & Johnson. The Motley Fool recommends Apple and Johnson & Johnson. The Motley Fool owns shares of Apple and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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