Why Apple's Stock Split Helps-Temporarily
Canada is Not for Sale
A Great Commodity Stock
When Apple's 7-for-1 stock split takes effect on June 9, it will bring the stock's price down below $100 for the first time since early 2009, when all stocks were on sale in the depths of the economic crisis.
The value of the company won't change, because there will be seven times as many shares as previously, but the stock will "appear" cheaper to casual investors, who will perceive the stock to be more affordable at the two-digit price level. So their buying will give the stock a boost, for a while. But when the next market downturn comes, their selling will also put more weight on the stock than would have been there without their presence. After all, the split doesn't change the nature of the company behind the stock; it only changes the lens through which less-experienced investors view it.
And what about the professionals? For the pros, the split doesn't really matter. They'll just buy 7,000 shares (for example) rather than 1,000. To the pros, what matters more from last week's announcement are the increase in the dividend, which now provides a not-too-shabby annual yield of 2.3%, and the announcement of the increase in the share repurchase program.
The share repurchase announcement is bullish for shareholders, because it signals that management believes the stock is a good investment.
The dividend increase, however, is not so bullish for growth-oriented investors. As my father liked to say, dividends are a sign that a company is running out of ideas for growth.
Nevertheless, I believe Apple has many years of great cash flow ahead of it, so for conservative investors who want to buy and hold and collect a tidy little dividend stream, AAPL is an easy choice.
But AAPL is no longer a leading growth stock, and anyone buying the stock thinking he's going to get rich is living in the past. Apple's great days of growth are in the past, period.
Five years ago, when Apple had $40 billion in revenues, it was growing at a rate of 54% per year.
Today, with $170 billion in revenues, Apple is growing at a rate of 5%.
In short, the company is four times bigger, but growing at less than a tenth of its previous speed.
Eventually, AAPL will be like IBM, a big old company long past its prime, but still churning out dividends. That's not a bad thing. But it's not the Apple that a lot of individual investors will think they're buying when they buy the stock after it splits.
Last week, I discussed the main ideas in the book, Merger of the Century, which proposes that the United States and Canada should merge, to create a continent-wide superpower with excellent growth potential.
The main arguments behind the idea are that U.S. money, labor and entrepreneurism would enable more rapid development of Canadian resources, resulting in faster growth for the new entity, synergies of many sorts, reduced
duplication, improved economies of scale and a more competitive stance against the growing might of China.
Your feedback, as expected, was interesting.
Here's what U.S. readers said:
I read your article on combining Canada and the USA; I was stunned by the proposal!
I worked for a major oil company with offices in Calgary, so I got to spend a lot of time there, perhaps as much as a month each year; my perception of such a merger is that it totally misunderstands the Canadian spirit, certainly in Alberta and British Columbia.
On occasion I would mention that the Articles of Confederation of the U.S. openly welcomed the Canadian Provinces, and further that this invitation is still in effect today as it has never been rescinded.
Even with their low opinion of the leadership in Ottawa, nobody ever supported my offer; frankly they turned it down rudely, suggesting they might incorporate with Quebec should that province secede from Canada, before they would join the U.S.
Merger reminds me of the old story, that often a man and a woman can be great friends as long as they don't marry. If they do, troubles begin during the "honeymoon" and the relationship deteriorates from then on until divorce returns the friendly state. Our relationship with Canada is similar from my experience.
Respectfully, T.C., San Ramon, California
I have several Canadian friends. Most of them depend on trade with the U.S. to provide their income. One of them is an inventor similar to myself. The product of his invention sells 10:1 in the U.S. vs. Canada.
My experience has been that our neighbors to the north carry a certain amount of jealousy blended with animosity towards the U.S. As you described, the risk/benefit ratio of a potential merger is heavily in favor of the benefit side. The outcome seems inevitable. I only hope this happens in my lifetime.
S.D., Auburn, California
P.S. I thoroughly enjoy reading your investment advice.
I like this idea.
S.B., Philadelphia, PA
And here's what the Canadian readers said:
Hi Mr. Lutts,
With all due respect, I can tell you that this will never happen.
For many reasons that Americans cannot understand: culture, background, history, etc. You have to live over here to feel it.
But the main reason is that if ever that idea gained any traction in Canada-and it's not-Quebec would separate in a month.
I am telling you this because I know, being a staunch federalist living in Quebec. I would even under this circumstance vote for separation of Quebec from the rest of Canada.
I know that some couldn't care less; but most Canadians do not want to divide our country.
If that would come to happen, Quebec would not be the only province to separate from the rest of Canada. So what would be left for the USA to buy (as you say).
Canadians love to visit the USA but never-except a small minority like Diane Francis-would they want to merge with our neighbours from the south.
We are different from the Americans and we want to keep it that way ... and we are not for sale.
By the way, there was a movement some years ago for Canada to adopt the U.S. dollar. It never gained traction.
You probably wonder who was behind all of this. Well just guess: Diane Francis. As a Canadian-American she is somewhat suspect to the rest of us Canadians.
When the Canadian dollar got to par and above, she lost all her credibility.
Now I have to give you one thing. You did succeed in starting the conversation.
N.J., North Hatley, Quebec
So Americans would start using the loonie??? Bold idea but I don't want to lose my Canadian identity. Something like this would take years of political hammering. Thanks for making me think about new ideas!
L.T., Goderich, Ontario
I think USA should merge with Mexico cause in Canada we don't have to develop our natural resources faster. The point is why should we go faster when we don't have to. For money, ok, but we are not like USA, we don't spend money on things we don' t need, or things we may need. If you want something, work for it if you need it. In your options, it is easy to see that USA is desperate and ready in an irresponsible manner to do something but you do not show anything that you learn from the past, so, any of your options will bring Canada trouble. On the other hand, if like us you learn from your mistake then maybe we may have a talk and go deeper in life. Money is not everything in life but if really you want it, work for it. Otherwise, give up and do something different.
J.J., Fort McMurray, Alberta
If we can't even get a pipeline built from Canada through the U.S., something that would, in every way benefit citizens of both nations because or largely because of American politics, all of the thousands of additional hurdles that would be required to merge the two countries simply is not going to happen.
Canadian's views of the U.S. of A. have certainly deteriorated because of the never-ending stalling of your current President.
R.C., Mississauga, Ontario
HANDS OFF OUR COUNTRY!!!!!!!!!!!
I.D., Maple Ridge, British Columbia
Summing up, the Canadians-four of whom live within an hour's drive of the U.S.-are against it, while some U.S. citizens are for it. Furthermore, culture, as opposed to economics, elicits the strongest emotions. Also, it's notable that no one even bothered to discuss the five options that Francis presented.
Thus, my original conclusion stands. Until things get tremendously bleaker, particularly for Canadians, this idea is a non-starter. Culture will continue to trump economics. But it was fun to think about!
Moving on to the stock market, the past six weeks have been very interesting, featuring a breakdown of momentum in formerly hot growth stocks, amid a background of resilient performance by the market as a whole, particularly large dividend-paying stocks like Apple.
Most interesting of all has been the strength in commodities, from oil and gas to fertilizer, coffee, soybeans and nickel.
I could try to explain this shift in leadership, mentioning the economic cycle, interest rates, housing, the weather, international politics and more, but it wouldn't really help. The fact is commodity stocks are strengthening, so it's time to explore opportunities there.
My suggestion today is a commodity stock with a growth twist.
It's WhiteWave (WWAV), a food company that was spun off from food giant Dean Foods in October of 2012, and has done just fine since.
Here's what Mike Cintolo wrote about it in Cabot Top Ten Trader back in late March.
"While every investor loves a company that's set to quadruple earnings during the next year or two, most big investors also love to hunt for small companies with years of relatively consistent, foreseeable growth ahead. Retail stocks often fill that criteria, and that's why WhiteWave Foods is making its inaugural appearance in Top Ten. Like many in-favor food companies, WhiteWave produces a variety of popular organic food and drinks, including Silk, Land O'Lakes, Earthbound Farm (which it bought in January in a deal that will boost earnings this year) and Horizon Organic. With revenues approaching $3 billion, WhiteWave's growth is moderate and steady. The long-term trend toward healthy eating should remain a wind at the company's back-just 26% of U.S. households buy plant-based beverages like Silk, for instance, but that's up from 16% in 2009. And organic packaged salad is now 23% of the total salad category, up from 14% in 2009. There's nothing revolutionary here, but WhiteWave is a firm with leading organic brands and top-notch distribution in an industry that's sure to grow in the years ahead. The valuation is elevated, but big investors (440 funds now own shares) are willing to pay up."
That was a month ago, when the stock was trading at 28. Since then, it's dipped to 26, bounced right back to 28, and is still in that range today, despite the market's weakness. The odds are very good that a blast to new highs-through 30-is only a matter of time.
So, you could just jump in and buy some here.
Trouble is, you'd then be on your own, and it's unlikely that I'll write about it again for quite some time.
The prudent course, therefore, would be to take a trial subscription to Cabot Top Ten Trader, so you can get Mike's regular weekly updates on the stock. This could be the beginning of a very long and profitable run, and if it is, you can count on Mike to keep you in the stock.
But if it doesn't work out-maybe the comamodity surge proves short-lived or maybe the entire market heads south for the summer-you can count on Mike to get you out with minimal losses.
Get more details here.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
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