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Summary

  • Apple has had phenomenal revenue and earnings growth over the last 15 years.
  • Over the last 3-5 years, growth has slowed considerably for Apple.
  • Despite slower growth, Apple stock has meaningful return potential.
  • The value for shareholders going forward may come more from dividend growth than earnings growth.

Apple (NASDAQ:AAPL) is one of the most followed stocks on Seeking Alpha and quite possibly could be the most widely held stock. A peek into the top holdings of most large cap or technology focused mutual funds will most certainly list Apple. It's not surprising considering Apple has a market cap of $480 billion, the largest company by market capitalization by a good $55 billion. (Exxon Mobil Corp. (NYSE:XOM) has a market cap of $422 billion)

But just because Apple is held by all of the top mutual funds doesn't mean individual investors should follow suit. To determine if Apple is still a good buy, or even a hold for that matter, I wanted to evaluate it for myself.

Apple Historical Results

The chart below shows the 15 year earnings history for Apple with an average earnings growth of 29% and average PE multiple of 25.9. Based on Apple's current PE ratio of 13, Apple looks extremely undervalued. Particularly after it started paying dividends in 2012.

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To better evaluate whether Apple is truly undervalued, it would be best to focus on a shorter, more recent period, to determine if the earnings growth potential is still there and how dividend growth may provide additional shareholder value in the long run.

Looking at the 5 year Fastgraphs chart below reveals a slightly different picture. Apple still looks slightly undervalued, trading at a PE of 13 compared to the 5 year PE average of 15.7. But the chart reveals another interesting trend over the last 5 years. The price for Apple had hugged the blue PE ratio line until sometime in 2012, when the price of Apple stock declined after a 10% drop in earnings. Despite the 7% subsequent growth in earnings in 2013, it seems the price of Apple stock still hasn't reverted back to its previous trajectory.

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Where does Apple go from here?

On a going forward basis, Apple has the potential to provide a total return of 15% if analyst estimates prove accurate. The graph below highlights earnings per share (EPS) estimates of 13 Capital IQ analysts that follow Apple. The EPS growth estimates are highlighted in red below and we can note that earnings growth for 2014 is expected to be just 7%, 8% in 2015, 8% in 2016, 6% in 2017, and then 15% thereafter. If these estimates were to hold true, the price of Apple stock is expected to reach $1054.96 by 2019.

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You will also notice in the chart below that Apple looks slightly undervalued. Think of each of the vertical lines to the top and bottom of the thin orange line as levels of certainty. While the chart is designed to provide you with information to make better investment decisions, it is not perfect. Each of the vertical lines represents a degree of certainty. The further the line is from the center line (thick orange line), the more certain the price will be in that range.

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The chart above is based on the estimates shown in the table below. Notice the brown highlight box, indicating the expected price of Apple stock in 2019 if earnings estimates shown above are realized. In 2019, Apple is expected to generate $70.33 of earnings per share and pay out a dividend of $24.54 per share.

What this shows me is that Apple is no longer as compelling a growth stock story but more of a dividend growth story. If dividends do reach $24.54 by 2019, it would be exactly twice as high as it is today, which is a 12.3% growth in dividends over the next five years. Dividend investors take note.

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If you are confident that Apple's earnings will reach or exceed that level, then Apple is a buy. However, I wanted to add some sensitivity analysis to those estimates to determine what the potential return for Apple shareholders would be if it were to fall short of those estimates.

I reviewed analyst estimates on MSN and used the lowest estimates provided by any analyst for the subsequent two years and used a long-term growth rate of 12% thereafter. (12% is the average long-term earnings growth rate of all analysts on MSN)

Highlighted in red below are the EPS estimates I inputted for 2014 and 2015 as well as the long-term growth rate thereafter. The estimated total return on the top right declines slightly but is still very attractive at 13.9%.

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I ran several other scenarios and the results were similar. It would take a collapse in earnings for Apple not to generate double digit returns for shareholders over the next 5 years.

So while Samsung and others are competing fiercely with Apple, it seems there is still some upside to holding it longer. I first mentioned the upside potential for Apple in an article published in September 2012 called 75 Million iPhone 5 Sales Equals $1000 Apple Share Price. I have yet to be proven right but I still feel Apple is heading towards $1000. I just think it's going to take a little longer than I first anticipated as it goes from a go-go growth stock to a dividend growth stock. Perhaps in another 23 years, Apple will join the Dividend Aristocracy.

Sources: Fastgraphs, MSN.com

Source: Slower-Growing Apple Is Still A Buy