More Lessons from Vegas: Rethinking Apple
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My regular readers know the high regard I hold for dividends, which is why I have never paid much attention to Apple (NASDAQ: AAPL). A recent trip to Las Vegas reminded me, however, that there can be an opportunity cost to being too mechanical in one's approach to things (like, for instance, insisting that a stock pay a dividend).
My usual game in Vegas is Limit Texas Hold'em (a variant of poker, for you non-gamblers). My playing style is much like my investing style, stodgy and mechanical. I fold most of my hands before I've put any money in the pot, content to wait for the premium cards that will beat my usual opponents, tourists and drunks that will play any cards, call any bet.
On this last trip, however, I was seated with a group of local retirees, regulars, just there to pass the time. They all knew to fold most hands, and they were conservative in their betting. In other words, I was facing nine people who played just like me. As a result, the money just trickled around the table, with none accumulating in any one place, except for the dealer's rake bucket.
After a couple of dozen hands, I realized that I had to do something. I started playing many more hands, I started bluffing shamelessly, and I started betting aggressively. My opponents, convinced that I was much like them from my earlier play, assumed that I was just having a good run of cards and folded again and again. The money still was only trickling, but it was trickling to me. I only had to show my hole cards twice, never was forced to reveal a bluff, and eventually walked away from the table with a comfortable profit. This was entirely due to my willingness to adjust my style to a specific situation.
So, what's Apple's situation? It's recently had a major shakeup in leadership, it's sitting on a boatload of cash ($98 billion!), and the new skipper seems willing to change course. How can I adjust my investment style to account for Apple?
Well, looking in my toolbox, I still only have that one dividend hammer. Luckily, among the things CEO Tim Cook is rumored to be contemplating is paying a dividend! The story in the second link above suggests about $2/quarter, for an annual yield of 1.4%. Let's consider a wild case, too -- if Apple paid out half its earnings, that'd be a yield of 11%! That's madly unlikely, of course, but consider it a proxy for all the wonderful things that Apply might do with its money.
For my process, I need some companies to compare with, but Apple does so many things. Apple is a hardware company. So are Dell (NASDAQ: DELL), and Hewlett-Packard (NYSE: HPQ). Apple is a software company like Microsoft (NASDAQ: MSFT). It's a media company, like CBS (NYSE: CBS). How do these companies all compare (the Apple yields in the following table are speculative)?
Apple's "wild" case is tied with Microsoft, trading off margin for yield. The "mild" case ties with CBS and Hewlett Packard, both "bad" stocks by my system, which is not always a bad thing. Apple's clearly not in the "ugly" class with Dell.
So if Apple declares a dividend, it will fit neatly into my investing universe, not to mention drive a herd of stodgy investors like me into the stock. Even if it doesn't, it will eventually do something nice with all that lovely cash, which should be more than enough to sustain the stock's current upward trajectory.
This is one case where I should definitely adjust my style, and buy before the dividend.
My thanks to Sam Braids, author of "The Intelligent Guide to Texas Hold'em Poker", and Ken Warren, author of "Winner's Guide to Texas Hold'em Poker". Talk about books that pay for themselves!
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