This week we are not going to use the DividendMax tools to produce long lists, shortlists, Optimised yields, etc, but I am just going to write about the world’s greatest company and why I think investors should tuck it away for the long term with near guaranteed high returns in both income and capital through consistently high dividend increases.
Has Apple lost its core?
Apple Inc. has long been a stock market darling, but in the past twelve months, this has all changed. Last week it released its latest iPhone models and the market decided to wipe almost $40 off the share price. As a result, it sits on a lowly rating of just 11.8x to the year ending 30/09/2013. This falls to 10.7x 2014 average estimates and 9.64x 2015 average analysts’ forecasts according to the Nasdaq website. The market seems to be arguing that with the loss of its highly driven founder, Steve Jobs, that Apple has indeed lost its core and ability to innovate and produce new blockbuster products.
Even if you accept this argument, and I have to say that I do not, Apple still remains a compelling investment case. It could be argued that the new core of Apple from an investment point of view will be long term dividend growth. For that reason we are going to examine the dividend effect over several different scenarios and try to give the reader a long term perspective on the performance of Apple shares.
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A brief history of Apple Inc. Apple Inc. formerly known as Apple Computer Inc., is a multinational consumer electronics company that manufactures personal computers and commercial servers, produces computer software and is a digital distributor of media content. Apple's core product lines are the iPhone smart phone, iPad tablet computer, iPod portable media players, and the Macintosh (now the iMac) computer products. The original founders Steve Jobs and Steve Wozniak effectively created Apple Computer on April fools day, 1976, with the release of the Apple I, and incorporated the company on January 3, 1977, in Cupertino, California, where they are still based today. For the first twenty or so years, Apple Computer Inc. was predominantly a manufacturer of personal computers, including the Apple II, Macintosh, and Power Mac lines, but it faced poor sales and low market share throughout the 1990s. Steve Jobs, who had been ousted from the company in 1985, returned to Apple in 1996 after his company NeXT was bought by Apple. The following year he became the company's interim CEO, which later became a permanent role. Steve Jobs then went about instilling a new corporate philosophy of recognisable products with simple design and ease of use, starting with the original iMac in 1998. With the introduction of the successful iPod music player in 2001 and the iTunes Music Store in 2003, Apple established itself as a leader in the consumer electronics and media sales industries. Ever conscious of image Steve Jobs and his team decided to drop "Computer" from the company's name in 2007. The company is now also known for its iOS range of smart phone, media player, and tablet computer products that began with the iPhone, followed by the iPod Touch and then iPad and iPad mini. As of 2012, Apple was the largest publicly traded corporation in the world by market capitalisation, with an estimated value of US$626 billion at the peak. Apple Inc.’s market cap was then larger than that of Google and Microsoft combined. It held the top spot since the first quarter of 2012 with Exxon Mobil in second. That has recently reversed and Apple now sits in second place. Apple's worldwide annual revenue in 2010 totalled US$65 billion, growing to US$127.8 billion in 2011 and $156 billion in 2012. |
I recently wrote an article on a FTSE 250 company called RPS which has an enviable track record of 20 years of dividend increases at a rate of 15% per annum. When you work out the overall growth over the period it is a staggering 1636%.
It was pointed out to me that it is all very well highlighting the fact retrospectively, but what about being proactive and actually naming some companies that will be able to do that. My answer was that many companies will achieve that, but there is only one company that actually should and could achieve it (and more if they were minded to). That company is Apple.
Firstly, let’s have a look at the dividend history of Apple. It began midway through the 2012 financial year with two dividends of $2.65. The history is in the table below:
|
Year |
Amount Paid in the year |
Percentage growth |
|
2012 |
$5.30 |
N/A |
|
2013 (est) |
$11.80 |
122.6% |
The first Quarter of 2013 saw a further payment of $2.65 and the second quarter saw this increased by 15% to $3.05. That was maintained in the third quarter. The number above for 2013 assumes one further payment of $3.05.
If we assume that the standard increase in the dividend is going to be 15% for the foreseeable future, what will happen to Apple’s dividend over time? The base is $11.80.
5 years
The dividend will rise to $23.73
10 years
The dividend will rise to $47.74
20 years
The dividend will rise to $193.12
50 years
The dividend will rise to $12787.15
These are staggering numbers, particularly in the long term. The table below produces a number of scenarios and then we will go onto look at how possible it will be for Apple to achieve these scenarios. (Clearly we appreciate that investors will not be concerned about, nor believe that the 50 year timescale is achievable, but we put the numbers in to demonstrate the long term effects of compound growth) We do believe however that the 20 year scenario is well within the realms of possibility.
|
Timeframe |
Base Dividend |
Dividend Growth |
Expected dividend at period end |
|
5 years |
$11.80 |
15% |
$23.73 |
|
10 years |
$11.80 |
15% |
$47.73 |
|
20 years |
$11.80 |
15% |
$193.12 |
|
50 years |
$11.80 |
15% |
$12787.15 |
|
5 years |
$11.80 |
20% |
$29.36 |
|
10 years |
$11.80 |
20% |
$73.06 |
|
20 years |
$11.80 |
20% |
$452.38 |
|
50 years |
$11.80 |
20% |
$107385.17 |
|
5 years |
$11.80 |
25% |
$36.01 |
|
10 years |
$11.80 |
25% |
$109.89 |
|
20 years |
$11.80 |
25% |
$1023.48 |
|
50 years |
$11.80 |
25% |
$826766.09 |
Given the most recent rise in the dividend of 15%, the most likely scenario will be for near term 15% increases. How much will this cost Apple?
The base year is 2013 and the base dividend is $11.80. We assume that there will be no share buybacks. We know that Apple has committed to share buybacks of $60 billion, but it is impossible to calculate the effects upon the balance sheet, earnings per share and ultimately how much Apple will pay out in dividends against a diminishing number of shares without knowing details of the buyback.
Let’s run the 20 year scenario:
|
Year |
Dividend Payment |
No of shares in issue |
Dividend Payment |
|
2014 |
$13.57 |
938.65m |
$12.73 billion |
|
2015 |
$15.60 |
938.65m |
$14.64 billion |
|
2016 |
$17.94 |
938.65m |
$16.84 billion |
|
2017 |
$20.63 |
938.65m |
$19.36 billion |
|
2018 |
$23.73 |
938.65m |
$22.27 billion |
|
2019 |
$27.29 |
938.65m |
$25.61 billion |
|
2020 |
$31.38 |
938.65m |
$29.45 billion |
|
2021 |
$36.09 |
938.65m |
$33.87 billion |
|
2022 |
$41.51 |
938.65m |
$38.96 billion |
|
2023 |
$47.74 |
938.65m |
$44.81 billion |
|
2024 |
$54.89 |
938.65m |
$51.52 billion |
|
2025 |
$63.13 |
938.65m |
$59.25 billion |
|
2026 |
$72.60 |
938.65m |
$68.14 billion |
|
2027 |
$83.49 |
938.65m |
$78.36 billion |
|
2028 |
$96.01 |
938.65m |
$90.12 billion |
|
2029 |
$110.41 |
938.65m |
$ 103.63 billion |
|
2030 |
$126.98 |
938.65m |
$ 119.18 billion |
|
2031 |
$146.03 |
938.65m |
$ 137.07 billion |
|
2032 |
$167.93 |
938.65m |
$ 157.62 billion |
|
2033 |
$193.12 |
938.65m |
$ 181.27 billion |
So, to give some idea of how easily Apple can afford to pay these dividends, it will take until 2024 before the dividend pay-out equals the free cash flow that Apple generated in the 2012 financial year.
Add to that the $146.6 billion cash mountain (just updated in the Q3 numbers) and we can be reasonably certain that Apple can grow the dividend at 15% for a very long time to come. Apple has strong dividend cover of 3.65x as well as the most cash rich balance sheet in the world.
Put it this way, assuming, the 15% per annum increase over the next 20 years, If Apple were yielding 4% in 20 years’ time, that would imply a share price of $193.12 x 25, which is $4828, which is more than 10 times the current share price"
I confess to being an Apple fan and own a Mac, an iPad and an iPhone. All of these products are of the highest quality and I would not go anywhere else.
So, will Apple crumble?
What about the lack of innovation. I cannot believe that all of that R&D and design spend will yield nothing. There is talk of Apple TV and an Apple iWatch. Big markets. The rumours around the watch sound very interesting with rumours suggesting that it might have sensors monitoring your blood pressure, pulse and other fundamental health indicators. As with the iPhone (where the phone is minor functionality), the watch will be minor functionality. It will be the other ideas that sell the product. Here are some of the current rumours / ideas flying around the internet regarding the Apple watch:
Current thinking amongst the internet’s techie websites is that wearable tech will be the next big thing. If it is going to be cool, you only need to look to one firm to achieve it. Apparently the iWatch is a big project if Bloomberg are to be believed. Rumour has it that Apple has a team of around 100 designers, software engineers, managers and marketing executives working on ‘a wristwatch-like device that may perform some of the tasks now handled by the iPhone and iPad.’
Further rumours from Bloomberg relate that British designer; Sir Jonathan Paul "Jony" Ive, accredited with the iPhone and the iPad, is leading the drive towards the ultimate watch. He is the lead designer of many of Apple's products, including the MacBook Pro, iMac, MacBook Air, iPod, iPod Touch, iPhone, iPad, iPad Mini and iOS 7. Will the iWatch be next? Almost certainly; even with Apple’s ultra-secretive culture, there are just too many stories going around about the Apple watch. And, we may not have to wait too long as Apple CEO, Tim Cook re-iterated in the Q3 numbers last Tuesday 23rd July that there will be ‘exciting new product categories’ with ‘some really great stuff coming in the fall and across all of 2014’.
The iWatch release date is unknown and the iWatch price is a mystery. Until we know what it is and does, the price is pure speculation. Bloomberg sources have hinted at a 2013 release date. We cannot be sure about that, but it will almost certainly be before the end of 2014. One of the current thoughts on the technology websites and blogs is how do you make it appeal to both sexes? Tricky one that? His and hers iWatches…surely it is going to have to be quite large to have an effective screen and lots of functionality? If anybody can do it, Apple can.
More speculation asks "Would it include Siri, the voice assistant? Would it have a version of Apple's maps software, offering real-time directions to people walking down the street? Could it receive text messages? Could it monitor a user's health or daily activity?"
Analysts say, if 10 per cent of iPhone customers buy an iWatch, Apple's looking at $7 billion a year in revenues, based on a cost of about $250 to buy.
It won’t be as easy as pie….will Apple be pipped at the post by the competition?
The wearable watch market could be the next big tech battleground as major competitor; Samsung has already confirmed that it has a smart watch in the works, apparently to be called the Samsung Gear. The Financial Times has also reported that Google has filed a patent for a smart watch. The Korea Times has floated a similar story about an LG smart watch. Sony also apparently has the ‘open smartwatch’ in the works. It already has the Sony Smartwatch 2, launched in June.
It is not unusual for Apple to let the competition forge slightly ahead. They watch and learn and then bring out the ‘slam dunk’ product.
So what about the numbers? Apples historic figures are as follows:
|
Year |
Turnover $ millions |
Pre-tax profits $ millions |
Earnings per share ($) |
Dividend per share ($) |
|
2009 |
42905 |
12066 |
9.22 |
0 |
|
2010 |
65225 |
18540 |
15.41 |
0 |
|
2011 |
108249 |
34205 |
28.05 |
0 |
|
2012 |
156508 |
55763 |
44.64 |
5.30 |
|
2013(E) |
170000 |
50050 |
39.50 |
11.80 |
Apple has a 52 week high of over $700 and at one point the market’s expectations were driving towards the $1000 mark. All that has changed very quickly however as the doubters have taken over and the bears have driven the stock down to below $400. It currently sits at $467, having taken a tonking over the past few days as the market reacted badly to its new iPhone variants.
In conclusion, Apple stock is cheap whichever way that you want to look at it. It is on an undemanding multiple and yesterday’s numbers show the resilience of key products like the iPhone which achieved record sales for the June quarter. The innovation will not just shut down and the company will continue to produce ‘cool’ products into the future.
All of this is underscored by an extremely powerful balance sheet and very robust cash flows which will lead to on-going returns to shareholders in the form of share buybacks and dividend payments.
If you strip out the cash from the market capitalisation, the earnings multiple falls dramatically. Effectively, approximately 36% of Apple’s market capitalisation is cash.
As a final pointer, Carl Icahn was buying in recent days and Apple enjoyed a big boost just hours after the billionaire investor bought “quite a bit” of the company’s stock last Wednesday. He wrote on Twitter:
‘We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.’
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Apple in Numbers following the 2013 Q3 results Apple sold 31.2 million iPhones, up from 26 million in the same quarter a year ago. A record for the June quarter. 14.6 million iPads were sold in the third quarter, down from 17 million in the year-ago quarter and 19.5 million in the second quarter 2013. Apple sold 3.8 million Macs in the quarter, down from 4 million at the same time last year. Revenue was $35.3 billion in the third quarter, very slightly up flat year on year. Apple's net profit for the quarter was $6.9 billion, still a staggering amount, but a fall from $8.8 billion the same quarter of 2012. Apple now has $146.6 billion in its cash mountain, up from $144.7 billion in the previous quarter and $137 billion before that. The company reported $2.4 billion in iTunes content sales, up 29% year-over-year. There are now more than 900,000 apps in Apple's App Store, including 375,000 apps for iPad. Apple has now paid out more than $11 billion to app developers since the App Store launched just more than five years ago. Customers have created 320 million iCloud accounts, sent 900 billion iMessages and received 8 trillion push notifications on iOS devices. There are now 408 Apple stores. |
As a final comment, if you are buying Apple for the long term, ensure that you fill out the relevant forms to ensure that you reclaim 15% of the 30% withholding tax that the U.S. charges overseas investors.
The best article that I have seen written on the subject of withholding taxes on dividends is by Lucy Warwick-Ching of the Financial Times and you can find it here:
http://www.ft.com/cms/s/2/166e21c0-a265-11e0-9760-00144feabdc0.html#axzz2eoSrGOcI
