Apple: Owner Earnings, Owner Earnings Yield And Payback Years

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 |  About: Apple Inc. (AAPL), Includes: IBM, INTC
by: John Rhodes

Quick Overview

In my previous articles, I provided a look into Owner Earnings for (NYSE:IBM) and (NASDAQ:INTC). I explained the concepts and the process I used to get the those values.

I suggest that you start with the IBM article because I provide you with a detailed explanation of the concepts of Owner Earnings, Owner Earnings Yield and Payback Years.

In this article, I will provide you with look into Apple's (NASDAQ:AAPL) Owner Earnings, Owner Earnings Yield And Payback Years. First, I'll give just a brief summary of each concept, then I'll deliver the results for easy consumption. I'll then provide a quick summary plus implications for AAPL investors.

Warren Buffett on Owner Earnings

Here's how Buffett explains Owner Earnings. It looks like this:

"If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (A) reported earnings plus (B) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)"

And, Jae Jun has simplified things like this:

Owner Earnings =

Reported Earnings (also known as Net Income)

+ Depreciation, Depletion, and Amortization

+ Other Non Cash Charges

- Maintenance Capital Expenditures

- Increase / (Decrease) in Working Capital

NOTE: I treat CapEx as "Maintenance Capital Expenditures" to keep things simple. This is an oversimplification. Furthermore, the impact is that this discounts the fact that some CapEx is almost certainly targeted at growth projects, not just for keeping the business operational. In other words, when all CapEx is treated as Maintenance CapEx, Owner Earnings are conservative. Caveat emptor.

Please note that for my calculations I use Jae Jun's Old School Value "Stock Analyzer" program which utilizes Morningstar's dedicated professional data feed. Jae's tool captures the formula for Owner Earnings that you see above.

Owner Earnings Yield and Payback Years

Let's keep this simple. Owner Earnings is already defined that above. So, let's look at how to calculate Owner Earnings Yield and Payback Years.

You can learn about Owner Earnings Yield per my previous article:

First, I grab the average Owner Earnings generated by the company over the last 3 years. Then, I divide the Owner Earnings by the number of shares outstanding. This provides me with the Owner Earnings per share. This is a beautiful thing because it tells me the actual dollar amount each share generates.

Second, I take the Owner Earnings and I divide that dollar amount by the price of a share in the business. This gives me one of my favorite metrics: Owner Earnings Yield.

And, here's Payback Years:

I take the price that I paid for the stock and I divide that by Owner Earnings per share. This gives me "Years to Pay Back" or simply, Payback Years. Again, this tells me how quickly the Owner Earnings will pay me back for my hard cash investment.

Rubber Meets the Road: AAPL Through the Eyes of an Owner

Let's look at AAPL's Owner Earnings over 10 years, 5 years, and 3 years. Note that for my actual Owner Earnings calculation I will use the 3 year average. Here's how the numbers look according to Jae Jun's Stock Analyzer program over the full 10 years:

(click to enlarge)AAPL OE FCFClick to enlarge

NOTE: Please look at the row called Owner Earnings FCF. That's the Buffett-style Owner Earnings calculation, year by year.

I like to average the 10 year, 5 year, and 3 year Owner Earnings to get a feel for how Owner Earnings are improving (or not) over time.

For your convenience, here are the 10 year, 5 year and 3 year averages:

  • $7,965.3 million (10 year)
  • $15,097.0 million (5 year)
  • $21,976.0 million (3 year)

Next, take the 3-year average and divide by the number of shares outstanding (899.74 million according to Yahoo). That gives me an Owner Earnings per share value of $24.42.

Next, with today's price of about $520 we're looking at an Owner Earnings Yield of about 4.7%.

And, lastly, we flip things around and divide the $520 share price by $24.42 of Owner Earnings we get about 21.3 Payback Years.

Wrap Up and Implications

With an Owner Earnings Yield of 4.7% you're getting a 4.7% return on your money. That number is higher if you believe that AAPL creates more money when they reinvest in growth. But, from earnings alone, we observe a 4.7% yield.

Furthermore, we know that with a $12.20 dividend that AAPL has reasonable coverage considering their Owner Earnings of $24.42 per share. About 50% of Owner Earnings are going to dividends.

Now, let's compare IBM, INTC and AAPL:

OE Triple Compare

AAPL has enjoyed tremendous growth in Owner Earnings growth over the last 10 years. However, from a conservative Owner Earnings, Owner Earnings Yield and Payback Years perspective, both IBM and INTC are superior. In fact, IBM is nearly twice as "strong" as AAPL.

Here's a little bonus. You might argue that AAPL is a better business with a stronger brand with a brighter future. Indeed, AAPL is the #1 Best Global Brand according to Interbrand. However, IBM isn't far behind at #4 and INTC is #9. There's a lot of love for both IBM and INTC.

I'll summarize by saying that these metrics are important to me because they indicate that AAPL is generating respectable amounts of real "owner" cash. But, even with a P/E ratio of about 13 right now, I wouldn't exactly call AAPL a screaming bargain. For perspective, IBM has a P/E of 12.4 and INTC has a P/E of 13.1 right now. They're all in the same P/E range right now.

This just the beginning. We can now start to ask more intelligent questions: How is AAPL reinvesting cash in growth? How is AAPL returning cash to investors? Is AAPL properly investing my Owner Earnings? How does AAPL compare to IBM, INTC and the entire Technology Industry? Owner Earnings, Owner Earnings Yield And Payback Years are a great starting point for deeper analysis.

As a reminder, please conduct your own due diligence. Nothing can replace your own rational analysis.

Disclosure: I am long IBM, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.