A year ago, the largest stock in the world was in freefall.
After hitting an all-time high of $700 in September 2012, Apple (Nasdaq: AAPL) shares tanked for more than nine months, falling more than 44%. Some Wall Street pundits wondered aloud whether Apple’s best days were behind it. To many investors, Apple was no longer hip.
What a difference a year makes.
With 43% gains in the last year, Apple is officially back. Most of those gains have come in the last six months. And the main catalyst behind the bounce-back is crystal clear.
For years, Apple was accused of being stingy with its massive cash stockpile. Prominent activist investors such as Carl Icahn and David Einhorn took Apple to task for its epic stinginess, imploring Tim Cook to unlock the company’s $150 billion cash hoard and reward shareholders. Einhorn even went so far as to sue Apple for its unwillingness to share.
Apparently, Cook listened. During its April 23 earnings announcement, Apple increased its dividend by 24% and increased its fledgling share buyback program from $45 billion to a record $130 billion. The company has already bought back $74 billion of its own stock.
It’s no coincidence that Apple shares have taken off since April 23. The stock has risen 25% in the four months since, recovering nearly all of its 2012-2013 losses.
No company can match Apple’s cash stockpile. However, there are plenty that could benefit from following their newly shareholder-friendly philosophy.
Take Amazon (Nasdaq: AMZN), for instance. Despite its well-documented struggles to consistently turn a profit, the online retail giant has $8 billion in cash versus a debt load of just $3 billion. Yet, Amazon does not pay a dividend and hasn’t issued a share buyback since early 2012. With its stock grossly underperforming the market over the past year (just a 5.5% return), Amazon could use a spark.
Yahoo! (Nasdaq: YHOO) is another example. The company’s stock has stagnated of late as the shine from CEO Marissa Mayer’s 2012 hiring has worn off. Though Yahoo has been rather generous in its share repurchases – increasing its stock buybacks by $5 billion last November – it could benefit from initiating a dividend for the first time in its history.
Of course, giving money back to shareholders isn’t an automatic cure-all for every company. Nor does every company need to pay a dividend or issue frequent share repurchases to attract investors.
That said, in the age of near-zero interest rates, dividend stocks have rarely been more popular. More than 400 of the 500 stocks that comprise the S&P 500 now pay a dividend. If you’re not paying a dividend, you’re in the overwhelming minority … and thus run the risk of getting slapped with the dreaded “stingy” label.
Until recently, Apple was large enough to weather that storm. But even they had to adapt to the new climate of returning money to shareholders.
In the midst of the third-longest bull rally in the last quarter century, it’s easy to just assume stocks will continue to rise unimpeded for months to come. Eventually, however, a major correction is coming. When it happens, investors will want to own stocks that consistently pay – and better yet, grow – their dividends.
A 3% or 4% yield is a good way to at least mitigate the effect of a steep drop-off in share price. Stocks that don’t pay dividends and don’t issue buybacks have nothing to cushion their fall.
Even the largest company in the world caved to pressure to give more money back to shareholders. When a company as successful as Apple decides that not paying a dividend and not issuing buybacks was holding it back, it’s a sign that every other company that can afford to do so should doing the same thing.
Get ready to profit big when Apple comes out with its biggest iDevice ever
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