With Q1 coming to a close at work, I received the first quarterly bonus of the year, which significantly boosted my income for the month of April. And with this influx of cash in my pocket, I took a quick trip to my favorite store in town: the stock market! So where did I deploy my capital you ask (because the post title doesn’t give it away at all)?
Well, there are quite a few stocks that have been hot on my watchlist lately, and I think that any of these would have made a fine choice; however, there is a certain fruit-flavored stock whose namesake is known for keeping the doctor away that I’ve had my sights on for a while now, and I finally pulled the trigger on it with this purchase. On 4/20/2015 I bought 8 shares of AAPL at $127.5/share, for a total investment of $1020.
When deciding whether or not to buy a stock, I perform both a quantitative and qualitative analysis. All the data I use to calculate shit is pulled from Morningstar. So without further ado, let us first take a look at some of the numbers and ratios (math ftw!) behind Apple.
When looking at a company’s revenue growth, I like to compute the compound annual growth rate over 10-year, 5-year, and 3-year periods. This allows me to see whether or not the business has been growing over time and it also shows me whether the growth has been accelerating or decelerating in recent years. Here’s a chart I whipped up of Apple’s CAGR for those 3 time intervals:
As you can see, Apple’s growth over the past 10 years has been absolutely incredible, with a CAGR north of 36%! In the last 3 years, growth has slowed down quite a bit, though a 3-year CAGR of nearly 20% is still pretty flippin’ great. In raw numbers, Apple’s revenue grew from $8.28 billion in 2004 to $182.795 billion in 2014, which is mind-boggling. And currently, the TTM revenue is sitting just a few million shy of $200 billion, so it looks like the company still ain’t going anywhere but up.
EPS growth is another important metric to look at because it will give you a better picture of a company’s financial health. Revenue growth is nice and dandy, but if net income isn’t increasing proportionally, then there’s clearly something wrong going on. Here’s what Apple’s EPS CAGR looks like:
As with the revenue, we see some phenomenal growth here. The 10-year EPS CAGR sits at a staggering 62%, which is enough to get Wall Street analysts more excited than a 35-year-old virgin nerd watching some Chewbacca-on-Princess-Leia-blow-up-doll-cosplay-action.
Such incredible EPS growth has undoubtedly been boosted by Apple’s massive share buybacks over the last few years (because if a company reduces its share count, this obviously increases the EPS since there are now less shares to divide up all dem monies). The EPS growth has slowed down significantly in recent times, but it still remains excellent and inline with the deceleration we see with revenue growth.
So far so good, nothing seems to be rotten in the state of Denmark (sorry Marcellus).
Return On Equity
I like to look at a company’s return on equity to get an idea of how much profit it generates with the money that shareholders invest in it. A really low ratio is synonymous with low profitability and begs the question of what the **** the company is doing with our cash. Apple’s return on equity sat a massive 33.61% in 2014, which is far above the usually desired range of 15%-20%. Clearly Apple is a pro at using its shareholders’ dough to generate even more dough.
One caveat: a really high return on equity can be inflated due to heavy leverage, which is obviously not good. So before rejoicing at the sight of a high return to equity ratio, it’s a good idea to look at a company’s leverage ratios, which brings me to…
Debt To Equity Ratio
The debt to equity ratio will tell you if a company has been using a lot of leverage to finance its growth. Acceptable numbers here will vary depending on the industry you’re dealing with, but generally speaking, a ratio of 1 is pretty decent, while a ratio above 2 sucks ballsack.
Apple’s debt to equity ratio sat at a deliciously low 0.26 in 2014, and the company didn’t even have any debt until 2013. That’s right, 2013 was the first year Apple even had a debt to equity ratio to compute, which is quite a feat.
Interest Coverage Ratio
Another important ratio I like to look at is the interest coverage ratio, which you get by dividing a company’s earnings (before taxes, interest, rainbows, etc.) by its interest expenses. It’s usually nice to see a number above 5 here, preferably even 10, again depending on industry. Unsurprisingly, with such low debt and such massive amounts of cash, Apple’s interest coverage ratio came out to a ridiculous 140.28 in 2014. I wish I could pay 140 times the interest on my debts, haha!
All in all, Apple’s healthy debt-to-equity and interest-coverage ratios confirm that the incredible return on equity it boasts isn’t the result of massive leverage, but rather the result of massive awesomeness.
Apple’s yield currently sits at a paltry 1.5%, but with the company’s share price having increased by incredible double-digit rates over the last few years, the dividend just hasn’t had much of a chance to keep up. Furthermore, the company has more than enough cash flow to feed the dividend in the coming years, as evidenced by its low payout ratio. Speaking of which…
With its payout ratio currently around 28%, Apple still has plenty of room to grow its dividend, and then some. If I recall correctly the company is planning on increasing the dividend at the end of the month, so these numbers for the yield and payout ratio will soon be outdated anyway.
Dividend Growth Rate
Apple only started paying a dividend again in 2012 after a nearly 20-year-long hiatus, so there isn’t much data to look at here yet. Usually I prefer to invest in companies that have been paying a dividend for at least 10 years, but I’m ok with making an exception for Apple since the only reason it didn’t pay a dividend for so long was because Steve Jobs hated dividends almost as much as he hated Adobe Flash.
So far, the dividend growth rate hasn’t been amazing, with a 15% increase in 2013 and a 7.8% increase in 2014. Not bad, but definitely not great, especially considering the impermeable financial fortress that is Apple’s balance sheet. Hopefully this year’s increase will be meatier.
I used a DDM (Dividend Discount Model) with a discount rate of 10% and a dividend growth rate of 8.5% to valuate the stock, which gave me a fair value of $130.92. So it looks like I got in on the stock at a fair price, which I’m happy with.
Of course, a DDM is just an approximation and it really depends on what you expect the dividend growth rate to be. In my calculation, changing the growth rate by a mere half-percent to 9% skyrockets the fair value all the way to $197.29. And honestly, I think that a 9% DGR is more than achievable for Apple over the long run. Furthermore, Apple’s P/E ratio currently only sits at about 17, which tells me that the stock might be somewhat undervalued. Who knows. I personally think that Apple’s intrinsic value currently lies somewhere in between those 2 values. Something like $160 seems like a good middle ground to me.
Overall, I’m very happy to have initiated a position in the pomaceous company. I view it as a dividend/growth hybrid, and one that there honestly isn’t ever really a “bad” time to buy into, kind of like Disney. I feel like being overly patient with stocks like these only leads to regrets down the road as one watches the price inexorably soar higher and higher while waiting for that perfect entry point that will most likely never arrive. Kinda like waiting for Santa to show up on Christmas Eve (that asshole, I even leave cookies for him every year, dammit!).
Just my 2¢.
What do you think of AAPL? Is it a stock you’d want in your portfolio? And do you think puppies are cute?
Disclosure: long AAPL (obviously lol)