Apple: First Growth, Then Value, Now Income?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Even with the recent decline Apple (NASDAQ: AAPL) has more than tripled in the last five years, going back to March 2008. This has been due to the enormous growth of Apple’s business. In the fiscal year ending in September 2008, the company’s sales were a little over $37 billion and net income was $6.1 billion. Fast forward to the most recent fiscal year and revenue had risen by a factor of 4, with net margins actually increasing to the point that earnings for the year were $42 billion.

The decline in Apple’s price, and more generally the fact that the stock price has actually underperformed the business, made the stock an intriguing choice for many value investors and analysts (including us at Insider Monkey, particularly after the fall in the stock price had initially begun). However, the value thesis from Apple has not played out at all as the trailing earnings multiple has fallen from about 12 or 13 to around 10 at present.

A number of hedge funds, who often invest from a value perspective, sold out of the stock in the fourth quarter of 2012, and while of course Apple was still on our list of the most popular stocks among hedge funds, it lost the #1 slot to AIG. We pay attention to hedge fund positions because our research has shown that imitating hedge funds' top stock picks generally outperformed the market.

Of course, even if Apple’s business isn’t growing it is still huge, and with very little necessary capital expenditures the company has produced enormous cash flows. The most recent 10-Q shows $137 billion in cash, cash equivalents, and marketable securities on the balance sheet following a quarter in which cash flow from operations was over $23 billion. Billionaire David Einhorn of Greenlight Capital, who was actually buying shares of Apple last quarter has only been the most prominent of a number of players urging the company to return the cash to investors. Bloomberg recently surveyed several analysts who speculated that the dividend may be lifted to a quarterly payment of $4.14 per share, which would make for an annual yield of 3.6% at current prices.

We often compare Apple to peers in the consumer technology business such as Google (NASDAQ: GOOG), but with the company’s value proposition to investors reportedly shifting it may be interesting to look at it against other large-cap technology companies paying high yields as well. Microsoft (NASDAQ: MSFT) happens to fit in both categories, and we’d also include Intel (NASDAQ: INTC) and Texas Instruments (NASDAQ: TXN) as income plays in the tech sector.

Texas Instruments and Microsoft pay yields of 3.2% and 3.3% respectively, and each posts a beta slightly above 1 (meaning they tend to trade more in line with the market than Apple does (the beta there is 0.7). Microsoft’s forward P/E multiple is even with Apple’s at 9, although in the case of Microsoft we would suspect a temporary bump to earnings from new versions of Windows and Office. Texas Instruments experienced a double-digit decline in revenue and earnings in the fourth quarter of 2012 versus a year earlier.

Intel’s yield is above 4%, and it trades at 10 times earnings whether we consider historical results or forward estimates. That company does look better from an income perspective than Apple hypothetically would, but where Apple has growing revenue and weak margins resulting in flat earnings, Intel has actually been experiencing a slight decline in sales, which combined with shrinking margins brought net income down 27% in its most recent quarter compared to the same period in the previous year.

Google, meanwhile, is working on generating income growth both from its advertising business and from better integrating Motorola Mobility Holdings. The trailing P/E is high (reflecting Motorola’s somewhat weak performance when it was brought onboard) but Google currently trades at 15 times consensus earnings for 2014.

We do think that Google has more growth opportunities than Apple, but that may be fully accounted for in its premium pricing. From a dividend perspective, if Apple does end up paying a 3.6% yield that would be quite competitive with other large tech companies: its business seems more stable than that of the three peers we looked at, though Intel would still pay a higher yield and would, like Apple, continue to have a value case as well.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in Apple, Google, and Microsoft. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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