In addition to posting posting our portfolio and the income we receive from it, I'm going to also post my reasoning for purchasing these companies. Overall, investing is about buying companies that add value to your portfolio. These assets should pay you back in a higher share price, dividends or both. My main focus is on receiving dividend payments so that I can reinvest those dividends by buying more companies. I think that if my strategy was to simply trade stocks based on price fluctuations, I'd be a poor steward of my finances. I'd pay commission fees in what is essentially gambling on hot stock tips. I'd much rather think like a business owner, and invest for the long term. I do speculate sometimes, but not in a way that would risk my family's ability to give or pay our expenses. Our goal is to create a portfolio of assets that generate income, so that we can use that income to bless others. Let's look at how AAPL accomplishes that.
AAPL is a company that designs, manufactures, and markets various products. These products include mobile communication and media devices (iPhone and iPad, and Apple TV), personal computers (Mac), portable digital music player (iPod), as well as software (iWork), services, accessories and networking solutions (iCloud, Apple Pay). AAPL was created in 1977 and has been committed to creating innovative products and solutions for consumers, businesses and governments.
What matters most: Cash money
Before we talk about the company's cash holdings and ratios, I think it's important to talk about its debt. AAPL has $28.9 billion in long term debt, and of that, $6.3 billion is currently due with the year. The amount of debt on AAPL's balance sheet isn't a concern, when we consider the reason AAPL has issued commercial paper and other debt instruments. The company has $155 billion in cash and marketable securities, and of that, $137.1 billion is held in foreign subsidiaries. AAPL has instituted a share repurchase program of $90 billion worth of the company's stock, and will be completed in December 2015. So far, the company has repurchased $67 billion of its own stock. Most of AAPL's debt was issued for the purpose of buying stock in the repurchase program, and to issue a quarterly dividend. AAPL's current assets total $68.5 billion, excluding the amounts held in foreign subsidiaries. AAPL's current ratio is 1.08 and their quick ratio is .67, meaning AAPL has an incredibly solid cash position to cover its current liabilities. I usually like to invest in companies with a P/FCF of 15 or below, and would consider adding a stock to my portfolio if it fits this criteria. AAPL has operating cash flow of $59.7 billion and free cash flow per share of $8.15, giving it a P/FCF of 13.6, which is exactly what I look for in a company. AAPL is in my portfolio, and I'll explain why towards the end of this post.
Dividends - The privilege of ownership
I like to invest in companies that pay a dividend in order to reduce my risk, earn a return on my capital invested, and reinvest those dividend payments into a snowball of dividend checks. AAPL currently pays a dividend of $.47 a quarter, $1.88 annually, which results in a 1.7% dividend yield. Their dividend payout ratio, when compared to earnings, is 29% and 23% when compared to free cash flow. AAPL can continue to increase its dividend payout, while maintaining a steady cash position for its operations. I like to do some calculations to see how long it would take one share of a company's dividend payments to equal another share, if prices remained the same and dividend payments were held for the sole purpose of buying one more share, with no compounding. It would take 58.8 years for one share to become two AAPL shares with the current level of dividend payments. I also like to calculate how many shares an investor would need to buy now in order to generate the equivalent of one share in dividend payments a year, all else being equal. It's interesting to note that, if an investor wanted to generate the cash in dividend payments for one share this year, it is equal to the amount of time it would take for one share to double from its dividend yield. Buying 58.8 shares would result in an extra share at the end of the year, generated by passive dividend income.
Book Value - Real Company Value
AAPL's P/B ratio is 5.2, meaning it is priced at about five and a quarter times its actual value. I personally like to invest in companies with a P/B ratio of 2 or less, and in some cases I'll invest in companies with a higher P/B if the income stream of dividends is worth paying more for it. AAPL is priced above 2 times its intrinsic value, but I think its worth being added to my portfolio.
Income - How well a company is managed
I normally don't like to rely on the income statement as a measure of value. I do think it offers the best glimpse of how well a company is able to manage its expenses while generating revenue, but I'll rely more on the cash flow statement to find value. AAPL's P/E ratio is 17.1. Most people invest in companies that have a P/E ratio between 15 and 25, while companies with a P/E ratio of 20 are seen as fairly valued, and using this criteria, AAPL is currently undervalued. Honestly I don't care too much about P/E ratios, but it can help me gauge whether or not I can pass up on a company that is priced too high, and look for other companies. AAPL has a gross margin of 38.59%, an operating margin of 28.72% and a net margin of 21.61%. This tells me that most of the expenses AAPL incurs has to do with designing and manufacturing its products.
Using Guru's DCF calculator and inputting FCF of $8.15 we get a valuation of $232.02a share, and $251.19 a share after adding tangible book value. This results in a margin of safety of 54%. The company is very cheap when looking at its P/FCF, and P/E ratios. An investor would have to seriously consider their investment philosophy and see whether investing in this business coincides with their investment objectives.
Why I'm Investing in AAPL
I'm investing in AAPL for a couple of reasons. To start, AAPL has been one of the most innovative companies we've ever seen. Although there was some skeptics who wondered if their drive to create revolutionary products left with the passing of Steve Jobs, it seems as if they are once again creating exciting products. Although Apple Pay and the Apple watch aren't completely new technologies, they are exciting and it will be interesting to see how all of these products sync with the rest of Apple's product and software base. Apple has also acquired Beats by Dre, and we haven't seen what Apple has in store for this partnership. Apple's deal with IBM is major, considering they have focused primarily on the consumer. Apple will now be able to diversify its revenue stream while partnering with the most influential business solutions company. I think there is a lot of growth for AAPL, and this includes their dividends. I am concerned that AAPL has changed from being a company that creates products that everyone else needs to challenge, to a company that has lagged in innovation and needing to respond to other companies' products. Overall, I think AAPL will continue to influence the way we engage technology, and each other, for the next couple of decades.