Where Does Apple Stock Fit Into Your Portfolio?

  • Apple's growth has finally began to relax, no longer making it Wall Street's current gold star of a growth investment.
  • The company maintains a modest but stable dividend that falls well below the S&P average, making it unnoticeable to income investors.
  • Strong margins and high ROA, Apple produces strong valuable cash flow but trades fair at its book value.

Incredible growth, innovative, and impressive operating margin are the best ways to describe Apple Inc. (NASDAQ:AAPL) – or at least it used to be. Apple has still performed on their margins, netting around a notable 22.9%. But investors should start to question what type of investment Apple currently is, and how it fits into their portfolio.

Growth Play?

Apple was one of the greatest growth stocks but that is now fading. Like always, the company performed incredibly well on their bottom line for Q1, but missed on revenue estimates. And they then hit us with Q2 revenue guidance below Wall Street estimates, with the possibility of falling below 2015 Q2 revenue. So, investors should be expecting fairly stagnant growth from Apple for 2016. With Q1 revenue up less than 2% YOY and Q2 being setup as another soft quarter on topline growth, Apple is showing that their 28% growth for fiscal 2015 is not indicative of their future. All in all now is not the time to add Apple to your portfolio as a growth play.

Income Play?

Apple offers a 1.93% dividend yield which can catch the eye of income investors, but it probably won’t. The average yield in the S&P 500 is 2.5%, which means Apple is not going to be seen as an income play because there are better options available. However, Apple’s payout ratio is only 21.83% for the trailing twelve months. So not only is Apple’s dividend reliable but there is plenty of room for an increase. However, historically Apple has held on to cash, and therefore, investors expecting a big jump in dividend payouts are likely to be disappointed. With the big telecom services offering yields between 4-5%, I don’t see how Apple would be able to motivate income investors.

Source: YCharts

Value Play?

This is where the majority of investor focus has been on Apple since their stock price has been lagging. A PE of 11.5, industry leading margins, great return on equity, it just feels like a value play. Return on assets for the trailing twelve months is 19.47%, which is above the industry average of 12.1%. Apple’s operating margin is 30.28% compared to the industry average of 22.7%. Obviously, we can see from these metrics that Apple has significant value in their operations and strategy compared to competitors. Combine this with a PE below the industry average and it raises questions about why Apple should be priced below competitors.

Source: YCharts

A lot of bullish Apple investors will typically point fingers straight to the company’s balance sheet as proof that they are undervalued. Unfortunately, that doesn’t work for me anymore. Sure, their $178 billion in equity and other investments is impressive, but their liabilities have helped somewhat balance that out. Total stockholders’ equity is approximately $128 billion, which is not a discount given a $600 billion market cap. However, this goes back to the greater value of their operating cash flow in comparison to competitors. So, while it may seem that they are trading at a premium compared to their book value, they make up for it in yielding higher profit margins. This is a close call, but with Apple producing such strong cash flow and trading at a lower than average PE with industry leading margins, there is a limited downside risk, making Apple a fair value play.

Conclusion

Apple is one of those stocks that just doesn’t fit into a strong position in one’s portfolio – but that doesn’t mean it has no place. It’s not a growth play now, but it has growth prospects down the line. It’s not an income play right now, but the company could boost their payout ratio and start paying out big dividends to shareholders tomorrow. And finally, they aren’t trading at a discount to their book value, but their superior OM and ROA margins make them more valuable to competitors.

So, what does it all mean to me? Well, I see Apple as a stock that doesn’t jump out at a specific investor like it once did as a growth stock. But that doesn’t mean it has no place. One thing Apple does offer is a little bit of diversity across the board – brand value to assist in future sales growth within consumer electronics for growth investors, a steady and very stable dividend for income investors, and a PE ratio that may undermine the company’s strong OM and ROA. However, does this stock appeal to a specific growth, income, or value investor right now? No, I don’t think so.

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Comments on this article and AAPL stock

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alex
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Because the iPhone business is so large and works on a 2 year cycle, then Apple as a whole can only be viewed or measured that way.

15 months ago, when Apple reported it’s first report for a full quarter of iPhone 6 sales, it reported the highest quarterly profit of any company ever, beating Exxon’s record by 13%.

In doing so it beat it’s own profit from the same quarter 2 years, i.e. one cycle, earlier by 37.4% or by 55.3% on a profit per share basis. Apple’s primary way of returning cash to shareholders is not by dividends, but by share repurchase.

Last quarter, the 12 months on quarter and the first report for a full quarter of the S version of the iPhone cycle Apple again reported the highest company profit of any company ever beating its own previous record by 1%.

In doing so it beat it’s own profit from the same quarter 2 years, one cycle, earlier by 40.4% or by 48.3% growth in profit per share.

Yes, it’s years over year growth was only 1%. But 2 years earlier in the same quarter it was 0%. That’s just part of the 2 year cycle.

It looks like overall for the 2 year cycle Apple’s earnings will be up about 40% or about 50% as profit per share which annualises to about 18% or 22% profit per share.

How, on the basis of that, do you report Apple’s growth story as being over. I

It’s been about to be over every year for the last decade, but has still managed 960% growth. Which annualises to 26% percent growth, and is about the same either as profit growth or as growth per share. Over most of that period Apple was not paying out the 2% dividend that it currently pays.
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