Thursday, September 3, 2015

Recent Buy: Apple Inc

This article originally appeared on The DIV-Net on Wednesday, 2 September 2015. 

Jul 30, 2015: Bought 22 shares of AAPL at $121.98 per share.
Aug 10, 2015: Bought 22 shares of AAPL at $118.43 per share.

Headquartered in Cupertino, California, Apple Inc (NASDAQ:AAPL) designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players. The company also sells a variety of related software, services, peripherals, networking solutions, and third-party digital content. AAPL was founded in 1977.


The company's products include iPhone, iPad, Mac, iPod, Apple TV, Apple Watch and a portfolio of consumer professional applications as well as the iOS and Mac OS X operating systems. AAPL provides online access to digital content and applications through the iTunes Store, App Store, iBooks Store, and Mac App Store. The company also provides a cloud service called iCloud and Apple Pay for making mobile payments.

AAPL distributes its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retails and value-added resellers.

The company started paying dividends again in 2012, so it doesn't have the established track record of dividend payments and increases I look for normally. In this article I'd like to present my case for buying AAPL shares for DivGro, my portfolio of dividend growth stocks.



Dividend Details


AAPL pays quarterly dividends of 52¢ per share in the months of February, May, August and November. At the closing price on Friday, 21 August 2015 of $105.76, the stock yielded 1.97%. The timing of my purchases was less than stellar, so I secured initial yields on cost (YoC) of 1.71% and 1.77%, respectively.

According to GuruFocus, AAPL's dividend payout ratio is 22%, which is ranked higher than 99% of the 1,280 companies in the Consumer Electronics industry. The median dividend payout ratio of the Consumer Electronics industry is 35%.


AAPL resumed dividend payments in 2012 after paying dividends from May 1987 through November 1995. Following is a chart showing the recent dividend payment history:




One of the reasons I like AAPL is that it has a low payout ratio, with plenty of room to continue raising dividends. The following chart compares EPS (earnings per share) to dividends per share, providing visual evidence that the company easily covers its dividends from earnings:



With AAPL's short history of only 2 years of dividend increases, DGR (compound annual dividend growth rate) is not such a big factor in my decision to buy AAPL. Nevertheless, assuming AAPL pays 52¢ in November 2015, the 1-yr DGR would be 9.97% and the 2-yr DGR would be 9.73%.

The following table presents the company's annual dividend payment history:



 Year 
#Payments
 Dividend 
 %Change 
 Price*
 Yield 
Months
2015
4†
$2.03†
9.97%†
$110.38
  1.84%† 
Feb, May, Aug, Nov†
2014
$1.85 
9.49%
$80.15
  2.30%  
Feb, May, Aug, Nov
2013
$1.69 
123%
$76.02
  2.22%  
Feb, May, Aug, Nov
2012
$0.76 
$57.86
  1.31%  
Aug, Nov
2011
$0
$46.08
 0%  
*Split-adjusted closing price on 31 Dec of previous year
†Assumes a payment of 52¢ in November 2015

AAPL has plenty of cash ($203 billion in Q3'15) to continue paying and increasing dividends. The company has become increasingly shareholder-friendly, returning $32.8 billion in dividends since Q4'12:


Source: Apple Inc

Notice also that AAPL's buybacks total $90 billion over the same period and that the company anticipates to return about $73.6 billion in dividends and buybacks through March 2017.


Stock Performance


In the last 10 years, AAPL has outperformed the S&P 500 by a margin better than 15-to-1, which is a remarkable performance. The following 10-year charts show the split-adjusted price of AAPL and the stock's performance relative to the S&P 500. In the price chart, the gold-colored line represents the 13-week exponential moving average.


Source: Scottrade

An investment in AAPL 10 years ago would have returned 1,565%, including dividends. That equates to a compound annualized growth rate of 33%, which is very impressive!

Source: GuruFocus


Analysis of AAPL


My fair value estimate of AAPL is $127.50, so I bought shares at a discount of about 6%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.
AAPL passes the following of my selection criteria:
  • Equity valuation multiple: price to earnings is less than 16 (TTM 11.91x)
  • Dividend payout ratio: ratio of dividend to EPS (earnings per share) is less than 50% (24%)
  • Debt: debt to equity ratio is below 50% (43% and 38% long-term)
  • Fair value: price discount is at least 5% of fair value estimate (6%)
AAPL fails the following of my selection criteria:
  • Dividend streak: at least 5 consecutive years of dividend increases (2 years)
  • Dividend yield: at least 2.5% (1.71% and 1.77%)
  • Dividend growth rate: 5-yr DGR is at least 10% (2-yr DGR is 9.73%)
Based on these statistics, AAPL earns 4 out of a possible 7 stars: (****---)


Other ratings for AAPL


 S&P Capital IQ's Stock Report (***--) Hold 
 MorningStar Rating (****-)
 TheStreet Ratings Rating Buy [B+]
 The Motley Fool's CAPS Rating (****-)
 Thomson Reuters StockReport+ (7/10) Neutral 
 Zacks Rank (Style Scores*) 3-Hold (A•A•A)
  *(Growth • Value • Momentum)

Here is the earnings and price correlated F.A.S.T. Graph for AAPL, in which I've activated an overlay P/E Ratio of 16. The 9/30/2016 price estimate at a P/E of 16x is $157.44.

Concluding Remarks


I mentioned earlier that the timing of my purchases turned out to be less than stellar. As a dividend growth investor, I'm not too concerned about that. As other dividend growth investors (Dividend Mantra and Dividend Growth Investor) have pointed out recently, time in the market is more important than timing the market. Certainly, if I like AAPL at $122 per share, I'd love the stock at a price below $110 per share! I'm considering buying more shares when funds become available...

Despite reporting record third quarter results in July, the company's stock price dropped on concerns about China growth prospects. Earnings of $1.85 per share increased 44.5% year-over-year on a surge in iPhone and Macintosh sales as well as higher services revenues. Total revenues increased 32.5% year over year to $49.6 billion. The company forecasts revenues in the range of $49 to $51 billion for the fourth quarter.


Risks for AAPL include significant competition in most of its operating markets, including from market leader Hewlett-Packard in the computer segment, Samsung in the smartphone segment, and from Google's Android on the software side. The company is heavily dependent on iPhone and iPad sales and increased competition will hurt AAPL's top line and profitability. Other risks include slowing iPad growth and the various legal battles AAPL is entangled in.


Of course, there are many reasons to buy, the most important one for me as a dividend growth investor being AAPL's increasingly favorable treatment of shareholders. Strong sales of the iPhone 6 and iPhone 6+ and AAPL's robust financial position are key growth drivers. The launch of the new iPhones broadened AAPL's base in Asia, with greater than 50% of the smartphone market share in Japan, market share gains in South Korea versus Samsung, and a boost of its market share in China to 12%.


Other growth drivers could include AAPL's new mobile payment system, Apple Pay, the company's entry into the smart watch market with the launch of Apple Watch, and AAPL's new Apple Music streaming service.


AAPL's retail business remains strong, with a notable partnership with IBM aimed at integrating IBM's Big Data and analytics capabilities with AAPL products. Furthermore, the iTunes store continues to deliver strong sales.


I purchased 44 shares of AAPL in two batches of 22 shares each, adding $91.52 to DivGro's projected annual dividend income. My portfolio has been updated to reflect these purchases.

13 comments :

  1. Nice purchase, FerdiS. Ive been eyeing AAPL myself - looks enticing at $112.

    R2R

    ReplyDelete
    Replies
    1. Thanks, Roadmap2Retire -- I think AAPL is a great buy at $112!

      Delete
  2. Yes a nice purchase at this price! No secret that I like AAPL!

    Cheers!

    Mike

    ReplyDelete
    Replies
    1. I jumped the gun on this one; nevertheless, I believe I should be fine in the long run...

      Delete
  3. Nice- Solid stock. Two questions:

    1. Would you buy more BBL or Rio Tinto?
    2. Any thoughts on Blackberry in the long term?

    ReplyDelete
    Replies
    1. 1. RIO is not on my watch list of dividend growth stocks. I already own two "lots" of BBL. Generally speaking, I want to balance my holdings and I have many stocks in which I own only one "lot" each So, I probably won't be buying more of BBL any time soon. Having said that, I think BBL is a good long-term investment if you understand that it is a cyclical stock.
      2. I have no interest in stock that don't pay dividends.

      Delete
  4. FerdiS, this is an illusive company for me. I want to buy it and have a buy price set at $107 (and have had that buy price for a while now). However, whenever I have cash-- AAPL is never in my range.

    AAPL has certainly hit my range and price-- but it moves very quickly in-and-out, so I have not caught it where I feel comfortable buying. Right now, it sits at $109, so out of my buy zone so I will continue to wait.

    I bought my first Mac computer at Sears way back when and have been a MacAddict sense

    ReplyDelete
    Replies
    1. I admire your discipline. For me, the difference between $107 and $109 is rather small. Buying in batches of about $2,500, I can buy 23 shares at $107 for $2,461 or 23 shares at $109 for $2,507. The difference is just $46, or less than 2%. The stock traded over $134 a while ago...

      Delete
  5. Sorry, sent the last message to soon. Meant to say, I have been a MacAddict since that now defunct magazine was published --and before anyone sold Mac products in the store. I have never owned a PC, or bought one. I only use those at work.

    I remember when APPL was $2/share and I implored our IT folks to change. They laughed. I wish I would have done as Peter Lynch advised and just bought a company I believed in. My goodness, wouldn't that have been something. Now I wait for a good entry point. :-)

    ReplyDelete
    Replies
    1. I'm an Apple product user, too (MacBook, iPhone, iPad, Apple TV, etc). I've owned AAPL shares before (pre-dividend), but sold my shares when a trailing stop was triggered. Now that AAPL pays dividends, I'm going to hang on to my shares.

      Delete
  6. Great company at attractive price for sure. Hope Apple's domination continues!

    ReplyDelete
    Replies
    1. I hope so, too! It would be interesting to see what today's new product announcements will be!

      Delete
  7. Its not discipline, it is just a strategy. I am mainly looking for higher yields, at a discount --on the CCC list. Since AAPL is <2% yield & not a CCC company, I will always defer to an undervalued CCC company with higher yield if on sale. QCOM, EMR, PG, HCP are just a few at the moment. I can't have a better buy for SWAN (for me) in front of me and buy AAPL- despite as much as I like the company unless the margin of safety or discount is substantial.

    ReplyDelete

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