Over the past few months, I have written several articles on Apple (AAPL) showing what a powerful free cash flow generator the company has been in the past and why I believe it will continue to be so in the future. Recently, the press, analysts on Wall Street and many writers here on Seeking Alpha, have turned bearish on Apple and this bearishness has caused many investors to sell their shares and bring Apple's stock price down. Many have stated that Apple is overvalued, but I believe the exact opposite to be true and I will prove it by introducing my work on "free cash flow yield" here to Seeking Alpha.
Let us begin our analysis by presenting a chart of Apple's free cash flow yield from 2004-present:
The black line in the chart represents Apple's market price action over the last decade and the green line represents its free cash flow yield. Free cash flow yield is calculated by taking a company's free cash flow per share and dividing it by the market price per share. For example when Apple was trading around its all-time record market price back on September 19, 2012, it's free cash flow per share then was $32.11 and its market price on that day closed at $681.78. So if we take 32.11/$681.78 we get 4.7% as it free cash flow yield. We used Apple's 2011 free cash flow per share result for our 2012 analysis as that was the known result at the time. By doing so, we in turn make this analysis more conservative as we are not forecasting, but are working off of known results.
On the other end of the spectrum, back at the known (after market crash) bottom of the market on March 9, 2009, Apple was yielding almost 12% and anyone buying the stock then would have made a gain of 748% over the next 893 trading days, when it hit its high. As further proof of how well "free cash flow yield" works, if we go back to December 24, 2007, you would have never owned Apple as its free cash flow yield was only 1% at the time and as an observer on the sidelines you would have watched its stock price fall from $192 to $79.61 over the next 230 trading days for a loss of -58.53%.
We have demonstrated in the chart shown above how well one would have done using a free cash flow yield by investing in Apple at the right time. But what should we do now? Should we believe the Apple Bears and sell? In observing Apple over the last few years, you would have noticed that Apple's free cash flow yield went back up to 11% and was only 1% short of where it was at the market bottom of 2009. It currently trades at a yield of 8.2%, so it is still very attractive at these levels and far from being overvalued as the Apple Bears have been stating. As for myself I will not start to worry until Apple hits a free cash flow yield of 4%. To achieve a 4% free cash flow yield, Apple's stock price would need to hit $995 a share.
In conclusion, free cash flow yield is a powerful ratio. If you can find stocks with very high yields, along with strong FROIC (Free Cash Flow Return on Invested Capital) and a low CapFlow (Capital Spending/Cash Flow) one can create a powerful portfolio. In the end the Apple Bears couldn't be more wrong about Apple.