Recent Buy – Apple Inc

Apple

First purchase of 2016! Well, that didn’t take long…the year started off with one of the worst starts in the stock market going back a decade or so. With the depressed market comes great opportunity to buy quality assets and putting my money to work. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to invest at regular intervals and build my passive income over the course of time. In a sort of ways, I am building my own pension, hoping to get to a point where I can simply live off my dividends without touching my principal investment.

Last week, I added to my position in Apple Inc (AAPL) with 10 shares @ $104.28. The stock yields 1.99% adding $20.80 to my annual dividend income.

Recent Buy Decision

  • Apple needs no introduction whether you are an investor, retailer or consumer. It’s the world’s largest company and is a money making machine with its tremendous pace of innovation that continues to capture everyone’s imagination. New products just keep coming year after year and the demand exceeds all expectations each year.
  • They have been able to command higher prices and the customers are happy to pay for it. Moreover, the brand loyalty is spectacular with some reports claiming upto 90%. The company does not compete in trying to race to the bottom. A luxury brand that does things in style and customers, including yours truly, is happy to pay for it.
  • Lots of new frontiers still exist for Apple to take a crack at – such as health (which is one of the main focus points in the new watch product), television, media, car etc.
  • Apple seems to be building a robust Services business. I shared a detailed look at the business segment in this article. I think this sector will continue to grow and be a bigger part of the company going forward.
  • Apple has come of age and has become a more mature company and the dividends have started flowing to shareholders. Apple is also becoming more shareholder friendly – even listening to activist investors like Carl Icahn and tweaking their buyback plans.
  • Apple having only started issuing dividends in 2012 started raising them out of the gate. The dividend grew by 15% in 2013, 8% in 2014 and 10.6% in 2015. The current payout ratio is a low 21.4% and considering the huge cash position that Apple holds (albeit overseas), increasing those dividends in the future should not be a problem.
  • Apple is able to tap into the bond market to raise money at record low yields (esp with that AA+ credit rating) – taking advantage of the low yield rates in Europe. It is interesting to note that Apple has issued bonds in EU as of late.
  • The valuation is extremely attractive and I think the stock is severely undervalued. A low P/E of 11.45, Forward P/E of 9.85, PEG of 0.82, the company is a proven cash machine (revenues last year exceeded $50B/quarter and overall earnings topped $52B annually – which translates to $1B/week of profits!). Going forward, revenue is expected to grow 3.7% in FY16 and 6.0% in FY17. Earnings are expected to grow 5.6% (FY16), 9.8% (FY17) and continue to grow next 5-yr at 13.92% annually.

AAPL-Fast-140116

Risks

  • Some speculators suggest that the best days of Apple are behind it (I vehemently disagree on this point) as the sales are expected to stagnate.
  • On the technology front, it constantly has to stay ahead of competition from other tech companies. In addition, the company always finds itself in court battling others over patent infringements. Consumers also seem to have become numb to new products, features and announcements.
  • Apple continues to rely on debt and use borrowed funds to fund its buybacks as the cash pile rises internationally. How will the company use the international cash pile remains unclear.
  • Curse of the Dow? Since the stock was listed in the DJIA, the stock price has languished. Will it be able to break out to its real value?

Full Disclosure: Long AAPL. My full list of holdings is available here.

15 thoughts on “Recent Buy – Apple Inc

  1. AAPL is solid and there are some bargains out there… It’s pretty crazy how bifurcated the markets are right now… Just look at where AMZN, NFLX, FB, etc. are, relative to AAPL…

    Best of luck! I’m anticipating an extremely difficult year for most equities in 2016… My gold trade has been beaten to a bloody bump and there’s probably more pain ahead.

    • There definitely are some bargains out there, but everyone is getting slaughtered. I am really not too concerened about what my investments do over the course of weeks or even months – staying focused on the long term.

      Ive been keeping a close eye on gold…I am considering buying in some now. I think theres a case for investing in gold for non-US investors where currencies are dropping like a stone, but in US$ terms, its not there yet.

      R2R

  2. Apple definitely looks to be at a solid value here with such a low P/E ratio. They’re much more insulated from overnight disruption than other tech companies because of their entire ecosystem. I don’t know if we’ll continue to see growth like they’ve given over the past couple of years but they should continue to do just fine given the potential market that still exists for their phones. I think they need to focus more on further development of their ecosystem rather than new products in order to get people to where they can’t afford to switch because it’d be too much hassle to deal with a la Microsoft with the rise of the personal computers. Product innovation will still be key to their success but I think the ecosystem is where the real value is at.

    • You are absolutely right, JC. Its the ecosystem that ties everything together and bring new ppl and keeps the old users as Apple customers. While that is true, I think customers have started reaching a bit of a been-there-done-that stage. A lot of the innovation that had to be done with the phone – esp hardware and physical innovation is mostly said and done. Future development and innovation will come from software and also on the seamless integration with other aspects – such as services (pay, fitness), health, car etc. The car development looks like an interesting step, esp if the rumors are true. They already have signed up with some of the leading auto companies for providing the software and act as the main interface with the CarPlay. It sure will be an interesting move if they decide to jump into the car game themselves.

      All in all, a cash machine – and I am happy to own a small piece of the pie 🙂
      R2R

  3. A lot of negative headlines have been surrounding AAPL for several weeks as their stock price has come down quite a bit. Of course, that’s usually the best time to add or initiate a positions when every one else is selling. I don’t own AAPL but can understand the appeal at these levels and they still are sitting on a boat load of good old fashioned cash. Thanks for sharing.

    • You said it, DivHut. Its hard to pass up on Apple at these levels. It very attractively valued and just the amount of cash they hold is humongous. I am actually surprised that they just have a AA+ rating from S&P. I would expect a AAA status for them already and wouldnt be surprised if their status is upgraded.

      R2R

  4. Hey R2R,

    Good choice! AAPL is a killer stock. I would even love to invest a little bit into it right now, but I’ve sworn myself off $US stocks for the time being. I just can’t deal with the exchange rate. Price of AAPL has been dropping steadily, so you chose a great time to jump in. I’m sure you’ll enjoy those rising divvies.

    Best regards,
    DB

    • I hear you on the fx rate, DB. I am feeling the same, but I take comfort in teh fact that my dividends are also in US$ and so my income will be higher. I dont see the US$ getting weaker anytime soon, so I decided to pick up some shares anyway.
      Apple is a one helluva cash machine. Growth focused funds are selling it and I will happily buy it.

      R2R

  5. We don’t own any Apple shares but certainly have contributed to their sales. We have iPhones, iPads, and a MacBook Air. Nothing beats Apple when it comes to virus protection and just sleek modern products. Nice pick up R2R, Apple brand is strong and those dividends should continue to roll in for you.

    Best wishes and continue success! AFFJ

    • How about running a Linux comp? I’m using free Lubuntu and don’t worry about viruses as with a Win box. Why is it that every data center you go into is running some form of Linux/Unix or Windows and AAPL products are no where to be found? Over the last 18 years I have been to many data centers for our own servers and maybe out of 1000 comps I see an AAPL server. AAPL is all about sleek like with a certain autos, clothes or jewelry.

      • We use Linux (and Windows) at work. At home, we’ve always had a Windows PC (had a Linux machine too a few years ago), but lately made the move to Mac. Even with the phones – both my wife and I moved to iPhones – and its great to be on the same ecosystem together…with all the native apps working seamlessly.

        R2R

    • I can see why people love Apple…we officially made the switch to Apple products lately and arent looking back at Windows or Android products. Really happy with the move.
      Thanks for stopping by
      R2R

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