When Apple Inc. (NASDAQ:AAPL) first announced that it would pay a dividend, a prominent corporate finance professor was quoted as saying that he had sold all of his shares in the company. His decision centered around the fact that by paying a dividend, Apple was effectively changing its shareholder base. Corporate finance principles state that a growth company will hold cash to fuel growth and a value company will return cash to shareholders if adequate investment opportunities are not available. By issuing a dividend, Apple Inc. (NASDAQ:AAPL) was now mixing its shareholder base and creating conflicting priorities. Growth investors are not concerned with returning to cash to shareholders and prefer acquisitions or investments to fuel the stock price. Value investors were more interested in tapping Apple’s coffers to increase yield and buybacks. The stock would climb above $700 before starting the precipitous decline that has attracted more attention than a Kardashian pregnancy.
There are many factors that likely contributed to the fall of Apple stock since its $700 high, but capital structure decisions do not seem to be widely discussed. If one thing is abundantly clear, Apple, through its own capital structure decisions, is now a value stock.
Apple’s Value Proposition
Embracing Apple Inc. (NASDAQ:AAPL) as a value opportunity becomes evident when you compare the company to competitors. Microsoft Corporation (NASDAQ:MSFT), a company that moved to value territory many years ago, currently trades at a P/E ratio of almost 17 with a dividend yield of approximately 2.8%. Apple offers a nearly equivalent dividend yield of 2.6%, but trades at a much lower P/E ratio of 11. If we take these numbers with the issues Microsoft Corporation (NASDAQ:MSFT) has faced with Windows 8 and combine them with Apple’s potential opportunities in new product releases and a China Mobile deal, Apple Inc. (NASDAQ:AAPL) is a much more compelling value opportunity than Microsoft.
If we step outside of the value stock spectrum and compare Apple to another major competitor, Google Inc (NASDAQ:GOOG), Apple still offers an attractive investment opportunity. Google continues to perform as a growth stock and chooses to invest its cash in acquisitions rather than return it to stockholders. Google trades at a P/E ratio of 26 compared to Apple’s ratio of 11.
That said, comparing the companies based solely on P/E ratios would be wrong if we accept Apple Inc. (NASDAQ:AAPL) as a value stock and Google Inc (NASDAQ:GOOG) as a growth stock. In order to better evaluate the stocks we will look at the projected 5 year PEG ratios. The PEG ratio compares a company’s P/E ratio to its expected EPS growth, and will help compare stocks with different growth rates. A ratio under 1 suggests the stock is “cheap” relative to its growth rate, and a ratio over 1 suggests the stock is expensive. Apple currently sports a PEG ratio of .53, while Google has a ratio of 1.74. Accounting for growth, we can see that Apple offers a much more appealing value relative to Google.
Apple Inc. (NASDAQ:AAPL) currently represents a strong investment opportunity relative to its major competitors. As a value opportunity, Apple clearly looks more attractive than Microsoft Corporation (NASDAQ:MSFT). Apple also appears to be a great opportunity when compared with competitors still operating as a growth stock.
The article Apple’s Drop – The Perils of Capital Structure originally appeared on Fool.com and is written by John Timmes.
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