What's Good for Apple is Good for America

Apple finally did it.

This morning they announced they’ll start distributing their almost $100 billion cash pile…

The company said it will start paying a dividend of $2.65 a share a quarter starting in July.

That’s about $2.5 billion per quarter in dividends. And that barely puts a dent in the cash it will generate in the next four quarters.

Not only do Apple shareholders benefit handsomely from the cash dividend, but the U.S. government benefits from the tax on the dividends.

Now, here’s where it gets interesting…

There’s a whole slug of mutual funds that are prohibited from owning Apple because it didn’t pay a dividend. But now that it does, a big chunk of institutional cash is going to buy Apple for the first time.

This new demand will push up the price of Apple.

This has Apple analysts raising their price targets — some increasing it 60% to $950 a share.

That would put Apple’s market cap at nearly $900 billion, close to the magical $1 trillion market valuation.

Last February 14th, I analyzed Apple’s fundamentals.

I made the argument that this giant stock could easily trade a lot higher. In fact, the fundamentals support a much higher valuation.

Here’s what I said…

Check out Apple’s revenue growth (in billions):

The year-over-year revenue growth for Apple between 2007 and 2011 is 46%.

Here’s Apple’s net income growth during that period (in billions):

The year-over-year net income growth for Apple between 2007 and 2011 is 66%.

A giant tech company shouldn’t be growing its bottom line 66%… yet it is.

Now, back in the heyday of the tech bull market of the 1980s and 1990s, a growth stock growing earnings of 66% would’ve been awarded a premium by the market for that growth. (Think of it as a major league baseball owner paying his slugger a bonus for hitting 50+ homeruns in a single season.)

You may remember that back during the tech bull, the market would give a stock growing earnings 66% a P/E multiple of 66… at a minimum.

And believe it or not, I was downplaying Apple’s growth, because its most recent year-over-year earnings growth is actually much higher…

It’s 117%.

So let’s crunch the numbers again based on today’s new numbers.

Today Apple trades at $590 a share. It trades at a P/E multiple of 16. Its forward P/E multiple is 12!

It trades at a TTM PEG ratio of .14.

PEG ratio is the P/E multiple divided by annual earnings growth.

A quick definition of PEG ratio: It’s a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share, and the company’s expected growth.

In general, the P/E ratio is higher for a company with a higher growth rate.

Thus, using just the P/E ratio would make high-growth companies appear overvalued relative to others…

It is assumed that in dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

Theoretically, when a stock trades below a PEG ratio of 1, it’s considered to be undervalued.

In other words, if Apple’s earnings growth (year over year) is 117%, it could handle a P/E multiple of 117. (P/E of 117/EPS growth of 117% = 1.)

Based on its current earnings per share of $35 on a P/E multiple of 117, Apple would trade for over $4,000 a share.

That’s a shocking revelation. But based strictly on the fundamentals, the $4,000/ share is warranted.

However, there is a concern — it’s called the law of large numbers.

Also known as the Golden Theorem, the law states a variable will revert to a mean over a large sample of results.

According to the New York Times, which recently ran a piece on the law of large numbers:

In the case of the largest companies, it suggests that high earnings growth and a rapid rise in share price will slow as those companies grow ever larger.

If Apple’s share price grew even 20 percent a year for the next decade, which is far below its current blistering pace, its $500 billion market capitalization would be more than $3 trillion by 2022. That is bigger than the 2011 gross domestic product of France or Brazil.

Put another way, to increase its revenue by 20 percent, Apple has to generate additional sales of more than $9 billion in its next fourth quarter. A company with $1 billion in sales has to come up with just another $200 million.

Apple could easily reach that market valuation.

But to get there, it would have to spin off into different companies like iPad Inc., iPhone Inc., etc…

The sum of the parts would be valued higher than the whole.

As goes Apple, so does the American stock market. It’s as simple as that.

The original bull on America,

Brian Hicks

Check us out on YouTube!

Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.