Apple: Pros and Cons of Being an Owner

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

With the stock price of Apple (NASDAQ: AAPL) down 25% over the past year (see chart below) shareholders are probably wondering what the future holds? Weighing the pros and cons will help answer the question.

AAPL Total Return Price data by YCharts

Pros

Balance sheet – Apple’s legendary balance sheet sports a cash and investments balance of $137 billion, as of the most recent quarter, with no long-term debt. Its cash balance represents 108% of its stockholders’ equity, exceeding software giant Microsoft’s (NASDAQ: MSFT) and search-tech conglomerate Google’s (NASDAQ: GOOG) cash to stockholders’ equity ratios of 94% and 77%, respectively.

Growth – Growth for Apple products continue especially on the Pacific Rim. Sales in Apple’s greater China segment grew 67% in its most recent quarter. Its iPhone and iPad sales grew 28% and 22%, respectively. As computing consumption continues to shift away from traditional PCs, the demand for Apple’s iPad and iPhone will continue.

Dividend capability – Apple shows great prudence, much to the chagrin of the investing public, in dividend payment. In the most recent quarter, Apple paid out $2.5 billion in dividends or 12% of its free cash flow. Members of the financial community, such as David Einhorn, manager of Greenlight Capital, feel that Apple should pay out some of its $145 per share in cash as a dividend.

Dividend growth – Apple hinted at the prospect of a future dividend hike or paying out a special dividend and it can certainly afford to do so. Bloomberg surveyed analysts who believe that Apple will boost its dividend maybe as early as today, the one-year anniversary of the dividend reinstatement. Apple shows a heavy desire for investing in research. Its research and development expense increased 33% YOY last quarter to $1 billion.

Cons

Product pipeline – With the death of Steve Jobs the investment community at large worries about future product innovation. The $64 billion question: Can Apple overcome market saturation and invent new products to capture consumer imagination? Only the future can tell.

Competitive environment – Apple operates in an immensely competitive environment. The mobile computing market represents a lucrative new avenue for growth in the tech sector.

According to a Bloomberg article, IDC expects Google to exceed Apple in tablet market share. In 2013, the Google Android devices are expected to hit 49% market share with Apple commanding less at 46%. Even Microsoft’s Surface is expected to hit a 7% market share by 2017, eating a little more into Apple’s pie.

Lower growth momentum - Apple’s overall sales growth of 18% exceeded Microsoft’s tepid growth of 3%. However, Google won the growth contest with 36%, partially explaining its recent run up in stock price.

Conclusion

On the whole, pros outweigh the cons. Apple possesses a super balance sheet with plenty of cash and no debt, making it possible for Apple to continue its current dividend. The shift to the mobile computing paradigm and away from PCs will continue to drive the demand of Apple’s iPad and iPhone. However, it will also drive the demand for the tablets and smartphones of Apple’s competitors: Google and Microsoft. Moreover, Apple’s dividend capability remains intact with rumors of hope for a boost in payout.

On the minus side, its product pipeline remains a mystery. Tech consumers need new products to hold interest. This indicates a slowdown in growth. With this said, Apple status will move from a high powered “growth” stock to a more value oriented “income stock.”


William Bias owns shares in Apple and Microsoft mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, 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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