S&P Dividend Stock Drops 12% but Remains a Strong Long-Term Investment Option

S&P Dividend Stock Drops 12% but Remains a Strong Long-Term Investment Option

When it comes to Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META)And Apple (NASDAQ:AAPL), which one is not like the others? These are all iconic tech companies, of course. But only one of these stocks is actually down year-to-date (YTD) as markets regularly hit all-time highs – Apple.

Apple stock is down nearly 12% this year and 14% from all-time highs, and feeling appears negative. As shown below, its underperformance relative to the high-flying stocks above is even more pronounced over the past year.

S&P Dividend Stock Drops 12% but Remains a Strong Long-Term Investment Option

Apple faces several challenges, such as a struggling consumer economy in China and a challenge of the Department of Justice (DOJ) in the United States. But make no mistake, Apple is still a powerhouse and the stock could be on sale soon.

Why is Apple stock down?

Apple has recently faced several challenges. Pandemic-era stimulus measures were a huge boon for consumer electronics, but those measures dried up just as inflation began to eat into people’s budgets. Investors are also focusing elsewhere, primarily on artificial intelligence (AI) (just look at the AI ​​stocks in the chart above!), where Apple is a minor player. But the main reason is China.

China accounted for 19% of Apple’s revenue in fiscal 2023 and 20% of its operating profit. China’s economy has struggled much more than that of the United States, and Chinese competitors like Huawei are taking market share. Reports indicate that iPhone sales in China were down 33% in February compared to last year. It’s a hindrance, but buying shares of a great company when it’s down is usually the best strategy for making money over the long term.

Now that we know some of the challenges, let’s look at the other side.

Is Apple Stock a Buy Now?

Here are three reasons to be optimistic:

  1. Consumer strength

  2. Services

  3. Repayment of capital.

While iPhone sales are down in China, they were up 6% overall last quarter, which was Apple’s fiscal first quarter. Total turnover increased by only 2%; however, operating profit increased 12%, a sign that margin pressures from inflation are easing. The American consumer is resilient and their confidence is at its highest level in almost three years. The recession that many feared is uncertain. Apple is now too big to be a high-growth name, but profits should remain robust.

Another reason for Apple’s significant increase in operating profit is its booming services segment, which has seen exponential growth, as shown below.

Chart showing Apple's service sales increase since the first quarter of 2013.Chart showing Apple's service sales increase since the first quarter of 2013.

Source: Statista.

Services include Apple Pay, iCloud subscriptions, advertising and others. Last quarter, these sales represented 19% of Apple’s revenue and generated a gross margin of 73%, compared to 39% for product sales. This means that Apple’s fastest-growing revenue stream is also its most profitable.

Apple is a cash cow that rewards shareholders handsomely. Last quarter, it generated $40 billion in cash from operations and returned $27 billion to shareholders in the form of dividends and share repurchases. Since fiscal 2020, $432 billion has been returned, which now represents 16% of the total market capitalization.

Apple uses more cash for buybacks than for dividends. Some say the dividend yield of less than 1% is unattractive, but I prefer buybacks. Stock buybacks are beneficial because investors are not taxed each year on these buybacks. Instead, they reduce Apple’s stock count, which increases earnings per share (EPS), and the stock price increases accordingly. Apple almost doubled the total return of the SPDR S&P 500 Trust since 2020.

Finally, I would be remiss if I didn’t mention the recently released Apple Vision Pro. This latest foray into wearable devices allows users to use apps, browse the internet, take and view 3D photos and videos, and play games on a screen as big or small as the user wishes to do so by “connecting physical and digital space”. This technology is way beyond me, but it’s pretty incredible, gives Apple another revenue stream, and demonstrates innovation.

Apple stock trades at a price-to-earnings (P/E) ratio of 26.7, just below its three- and five-year averages. So, interested investors need not rush to accumulate shares. Instead, respond to Apple’s current negative sentiment by buying slowly over time to take advantage of price drops. Many will tell you that staying committed for the long term is rewarding once you own the shares.

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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Bradley Guichard has positions at Nvidia. The Motley Fool holds positions and recommends Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

1 Magnificent S&P Dividend Stock Down 12% to Buy and Hold Forever was originally published by The Motley Fool

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