As an investor, you always want to keep your options open. Your stock watch list should be an ever changing list where companies are added and companies are removed from the list. For the longest time, I did not have Apple NASDAQ:AAPL on my watch list as it was not a dividend paying stocks but once it did, I felt prudent in adding the world’s biggest company to my watch list not to mentioned that it has been a hot stock talked by all.
Related: Managing Your Watch List
When looking at a company, it’s important to not look at it with emotions and it is sometimes hard. The love / hate relationship with their product is not what you evaluate but the business, its profitability, its growth and future potential. I personally ignored it for a couple of years when it first decided to pay dividends to its investors as I felt the stock was too hot – too much speculations. After their last quarters, I decided to have a look at it again, keep emotions out and review the company against your core investment tenants. I will admit that a lower price stock has made it more attractive to consider again.
Related: My 7 Investing Rules
Rule #1: Invest in what I know and understand
AAPL is a pretty simple business when you look at it. It basically sells electronics. I would even go as far as considering it an electronics company but it does so much with its app eco system, cloud infrastructure and operating systems that it’s not just electronics.
You walk in an Apple store and what you see is what you get. All their products are present at the fore front of the store for your shopping enjoyment. Apple basically sells consumer electronics at a high profit margin. That’s all I have to explain to my kids. The history behind Apple and Steve Job is not what we are investing in but the high profit consumer electronic devices desired by the masses.
Rule #2: Invest in companies that provide necessities
This is a rule where you need to make a judgement call. There are necessities that we simply cannot live without and then there are necessities created by developed nations. Are electronic devices such as a phone a necessity for living? Not per fundamental needs but it does have a major impact on quality of life and services that are a necessity. Basically, the essence of a necessity from a business perspective is to assess if consumers will need the products forever and replace the items over and over thus creating a continuous demand. I believe the smart phone has this property.
While not being a life and death necessity, developed nations have made the smart phone a must have for productivity and communication by businesses and individuals. I am very specific here to use iPhone as it is the bulk of Apple’s revenue and what revolutionized Apple. The Mac line of computers would not be enough for me to purchase Apple since tablets have started to replace computers and the separation of devices into consuming and producing segment have surfaced.
The tablet concept is not revolutionary at all either, many computer companies have toyed with the tablet idea for years. The advent of high speed internet, cloud storage and the app eco system has simply facilitated the adoption of the tablet as a consuming device. No need for a computer to Skype anymore, the tablet is enough. I don’t believe the tablet is a major player on its own in the necessity sphere list. The smart phone is the driver. I am also not looking at just Apple here but the market itself as you need a market to grow your revenue.
You will find more statistics at Statista
Rule #3: Only invest in dividend paying stocks
That’s a simply rule and Apple does pay a quarterly dividend again since 2012. It used to pay a dividend back in the 90’s.
Related: Why Dividend Investing
Rule #4: Focus on companies with an economic moat
With the smart phone revolution, there really are only 2 major players now. RIM was on top for a while but consumers clearly voted with their wallet that they preferred apps over an easy keyboard. We simply evolved away from email only to app and social interaction.
I don’t consider Apple to have an economic moat in the technology and software sector but I do for the consumer electronics sector. While their software and technology powers the ecosystem they have created and only Google has a similar infrastructure with their Android OS, it is their iPhone product that drives their profit and fuels their growth. Their profit margin is quite high and their skills in supply chain management is extraordinaire. Android has by far more devices with their OS but iPhone devices are more prevalent than any competitors providing Apple with a significant market and making it an economic moat fuelling their ecosystem and secondary products.
You will find more statistics at Statista
My investing rules are not stock picking rules but some of them do allow me to filter out specific stocks to ensure my portfolio is setup according to my goals. As such, the other 3 rules are pertinent to my portfolio management as opposed to a stock selection process. I do look at company metrics, once a company is on my stock watch list, it has passed my core investment rules so I can now pay attention to the numbers
AAPL by the Numbers
Apple tends to surf near the 52-week high so you’ll have to stomach an entry point near the top and get over that mental blocker if you have one. You also need to know why you are buying the company because there is so much written about Apple and speculations about future products that you might lose sight of what matters.
Related: Investing Mental Blockers
By The Numbers
By the numbers, Apple doesn’t seem overpriced at the moment. They obviously have a lot of cash and room for dividend growth as their earnings have also been growing in line without increasing their payout ratio. In comparison with Microsoft NASDAQ:MSFT, the P/E is lower and the payout ratio is still 14% below Microsoft which has a sustainable dividend policy and growth. This is to say that earnings aren’t the only way Apple can sustain a dividend growth pattern for dividend investors.
This past April, Apple announced they will buy back $30B worth of shares and an 18% dividend increase. A dividend increase goes straight to the investor while share buyback has a potential of providing a benefit for investors. Apple generates a lot of cash and as long as the continue to increase their earnings, dividend should increase. There is just too much cash to re-invest so they spread the wealth and it helps push the stock higher. All of that based on how well the iPhone continues to do and we have the circle of profits.
The numbers are very decent for a recent dividend paying company. One of my core metrics is to look at dividend growth but unfortunately, there are not enough data for a pertinent metric. The most recent increase was 18% which is well above the norm. If it can average at 10%, it would make it a great dividend growth investment.
- Market Capitalization: $614.95 B
- P/E: 16.36
- EPS: $6.43
- EPS Growth: 57% (5 year average)
- Dividends: $1.88
- Dividend Yield: 1.94%
- Dividend Growth: –
- Dividend Payout Ratio: 29.24%
While you may compare Apple () and Microsoft (), they both offer very distinct products and services. In fact, you could say that there is some overlap but if you were to look at where the major source of revenue comes from, you would realize that they complement each other. While Microsoft generates most of its revenue from enterprises, Apple generates it from consumers. Consumers will make Apple Pay happen through the iPhone. As you can see, the iPhone is again core to this business which requires Apple to sell more iPhone and get consumers to upgrade. The more iPhone, the more revenues from the Apple Store. Wearable such as iWatch are next in the product line and while they may work independently, they will pair with your iPhone. Apple Pay and iWatch will certainly help increase Apple’s revenue but it all ties back to the iPhone in my opinion so when looking at Apple, you need to look at iPhone sales. It’s a huge company but in its simplicity, it’s mostly about the iPhone just like Netflix () is about its subscriber numbers.
Between my core investing rules and my technical ranking (might be time to brand it Opportunity Score), I have decided to initiate a small position. Dividend aristocrats are nice to have as you can rely on dividend growth but some just increase their dividends by 1 cent so it’s important to look at more companies and not ignore newcomers. MSFT has done really well for my portfolio.
Related: S&P Dividend Aristocrats
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.