Apple Is A Top 5 Holding

| About: Apple Inc. (AAPL)

Summary

It took awhile, but Apple found its way into my retirement income portfolio.

Why I'm long Apple.

Apple is a top 5 holding.

Apple - One product, then the eco system, then the stock

In 2008, I went to an AT&T (NYSE:T) store to replace my old cell phone with a Blackberry. Several of my friends had one and I thought the little keyboard was cool. I walked into the store and told a very young clerk that I wanted a Blackberry. He pointed me to the Blackberry display and said, "Before you make a final decision, can I show you my phone?" I said, "Sure." He pulled out his Apple iPhone. (This was just after the first generation iPhone began to offer 16GB of memory rather than 8GB. He showed me the new touch screen. It may have taken me 30 seconds to make a decision, but I believe it was closer to 15. Nine years, and several generations, later, I still use an iPhone. Since 2010, our family has used the Apple operating system exclusively.

It took awhile, but Apple found its way into the portfolio

I wasn't so quick to buy the stock, however. The main problem was the absence of a dividend. Apple (NASDAQ:AAPL) paid a small dividend from 1988 to 1995, and re-instituted a dividend in August, 2012. I began to study Apple and realized that it was relatively cheap on a price/earnings basis, but I wanted a lower entry point. In mid-2013, when AAPL dropped to $58 (split adjusted) I made an initial purchase, hoping to get more around $53. I missed a chance to get a full position at $55.70. (That was my first mistake.) The stock started moving up and, disappointed, I sold my small stake rather than completing the position around $60. (That was my second mistake.)

In mid-2016, I began to warm up to AAPL again. I was moving the portfolio toward higher credit ratings, and Apple's Standard & Poor's credit rating of AA+ is stellar. By September, I identified a target price of $92. It bounced around in the low $100s, and I bought a full position at $104.78. My usual pattern is to build a position gradually, but the first time I tried that with Apple in 2013, I was disappointed. This time, I decided to jump into the deep end of the pool - sink or swim. Immediately, it was my fifth largest holding. Today, without adding any additional shares, AAPL is my fourth largest holding.

(Apple logo from lofrev.net)

Apple's fiscal year ends on September 30. Its 2017 Q1 ended December 31, 2016, and results were released on January 31, 2017.

The Company posted all-time record quarterly revenue of $78.4 billion and all-time record quarterly earnings per diluted share of $3.36. These results compare to revenue of $75.9 billion and earnings per diluted share of $3.28 in the year-ago quarter. International sales accounted for 64 percent of the quarter's revenue."

Apple provided guidance for Q2 2017, which ends March 31, 2017:

  • revenue between $51.5 billion and $53.5 billion
  • gross margin between 38 percent and 39 percent
  • operating expenses between $6.5 billion and $6.6 billion
  • other income/(expense) of $400 million
  • tax rate of 26 percent.

(Early Apple logo with prior company name from citelighter.com)

In a 2006 article, MacWorld cited "30 pivotal Moments in Apple's History," including:

  • 1976: On April Fools' Day, Apple Computer Company is founded in a residential garage by Steve Jobs and Stephen Wozniak. The third co-founder - Ronald Wayne - relinquishes his 10 percent stake in the partnership for $800 less than two weeks later.
  • 1978: The $1,298 Apple II is introduced as the first personal computer designed for the mass market. It featured an attractive low-slung case, a standard keyboard, power supply and color graphics capability.
  • 1980: In the largest initial public offering since Ford in 1956, Apple debuts on the stock market with a valuation of $1.8 billion. More than 40 of Apple's 1,000 employees became instant millionaires thanks to their stock options.
  • 1981: IBM introduces its $1,565 personal computer and within two years, IBM's market share eclipses that of Apple.
  • 1983: John Sculley, president of Pepsi-Cola (NYSE:PEP), becomes Apple's president and CEO after Jobs promised a "chance to change the world."
  • 1984: The Macintosh, "the computer for the rest of us," becomes available at $2,495, with 128K of memory.
  • 1985: Steve Jobs resigns from Apple after losing a boardroom struggle with Sculley.
  • 1992: After years of playing catch-up with the Mac's ease of use, Microsoft's Windows 3.1 is widely seen as good enough. Apple's 15 percent market share begins eroding even faster.
  • 1995: Differences between Mac/Windows user interface fall in the public's mind with Microsoft's (NASDAQ:MSFT) launch of Windows 95.
  • 1996: New CEO Gilbert Amelio kills Copland operating system in favor of buying Next Software from long-exiled Steve Jobs.
  • 1997: As an advisor following Next purchase, Amelio is removed as the CEO and Jobs assumes the role of interim CEO.
  • 1998: Dubbed "the Internet-age computer for the rest of us," the $1,299 iMac becomes the fast Mac model ever.
  • 2000: Confident in Apple's turnaround, Jobs accepts CEO role, splitting his time between Apple and Pixar, where he's also CEO.
  • 2001: The tiny $399 iPod is introduced with 5GB holding 1,000 MP3s, transforming Apple and the entire music industry.
  • 2003: Apple opens the iTunes Music Store with over 200,000 tracks available for 99 cents each.
  • 2004: Apple introduces the iPod mini with a 4GB hard drive in a smaller aluminum body available in an assortment of colors.

A 2016 MacRumors article "Apple Turns 40" cites these more recent developments:

  • 2006: The MacBook and MacBook Pro are introduced.
  • 2007: The iPhone and Apple TV are introduced, and company's name is changed from Apple Computer Inc to Apple Inc.
  • 2008: MacBook Air and App Store are launched.
  • 2010: The iPad is introduced.
  • 2011: Steve Jobs dies, Tim Cook is named Apple CEO, and Apple passes Exxon Mobil (NYSE:XOM) as most valuable publicly-traded company.
  • 2014: Apple Watch and Apple Pay are launched.
  • 2015: Apple Music is introduced.

(Photo of Steve Wozniak and Steve Jobs from britannica.com)

Growth of Apple

Here's a snapshot of Apple's growth since 2008. Sales, Pre-Tax Profit, and Net Income are in billions.

Year Sales Profit Net Inc EPS Low Price Low PE
2008 $32.5 $6.9 $4.8 $.77 $14.37 18.8
2009 $42.9 $12.1 $8.2 $1.30 $11.17 8.6
2010 $65.2 $18.5 $14.2 $2.16 $25.91 12.0
2011 $108.2 $34.2 $25.9 $3.95 $39.69 10.0
2012 $156.5 $55.8 $41.7 $6.31 $50.60 8.0
2013 $170.9 $50.2 $37.0 $5.68 $55.00 9.7
2014 $182.8 $53.5 $39.5 $6.45 $68.30 10.6
2015 $233.7 $72.5 $53.4 $9.22 $92.00 10.0
2016 $215.6 $61.4 $45.7 $8.31 $89.50 10.8

The rise and fall and rise again of Apple is now part of stock market lore. This story was captured in the 1994 movie, Forrest Gump, which includes this line from Forrest about Dan, his former Army officer and former partner in the shrimp business:

I never went back to work for Lieutenant Dan. Though he did take care of my Bubba-Gump money. He got me invested in some kind of fruit company. And so then I got a call from him saying we don't have to worry about money no more and I said, "That's good. One less thing."

(Forrest Gump movie dialogue from moviequotedb.com, photo from macprices.net)

Why I'm Long Apple

Unlike Forrest Gump, I was not an "early adopter" Apple investor. I used an IBM personal computer at work and at home I used a PC that was built by an IT friend. I was aware that Macs were preferred by artists and designers, but I never considered buying an Apple computer or making an investment in Apple. As I described at the beginning of the article, that changed when I bought an iPhone in 2008, followed by Mac computers.

Apple has a history of marketing excellence

I'm not a Peter Lynch, investigative style researcher. I don't walk around malls observing which stores are empty and which are full. But when our family embraced the Apple eco system, it meant occasional visits to Apple retail stores. Two were in strip malls and one was in an enclosed mall. In each case, the Apple store by far had the most-traffic of any other store in sight. The quality of the product and the retail experience made up for high prices. My good experience as an Apple customer put the company in a positive light and when Apple initiated a dividend, I began to study the stock.

Apple developed a culture, originally centered around Steve Jobs, that didn't seek to provide what the customer wanted, but sought to shape what the customer needed. The company anticipated, then drove, customer demand.

My son was originally drawn to Apple because of its early, colorful computers (some of which had transparent cases), but he has never left PCs and after using an iPhone for several years, he opted for a Samsung phone. His primary reason was his preference for an open operating system rather than Apple's closed, proprietary system. In contrast to his decision, many Apple customers are comfortable with Apple's closed operating system.

Apple supplemented its company retail stores with telecom partnerships that made it easy for mobile phone customers to choose an iPhone, with payments embedded in their telecom contracts spread over two years. The telecom "subsidies" have been modified so that more iPhone users purchase the phone directly, though still often spread over numerous payments.

One reason I'm long Apple is I've been impressed with its retail operation.

Apple has been a disruptive industry leader

Apple was a pioneer in the computer industry. Apple's iPod transformed the music industry. The iPhone disrupted the mobile, "smart phone" industry. The jury is still out on the competition between the Apple Watch and Fitbit.

Apple TV is now in its fourth generation and appears to be the basis for future generations of a multi-purpose appliance that provides access to various ways of presenting video programming.

There has been much speculation about an Apple Car. Some analysts have encouraged Apple to focus on the "dashboard" technology that could be used by multiple vehicle manufacturers rather than becoming a "car company." In January, 2017, MacRumors produced "Apple Car." On February 17, 2017, Digital Trends published an "Apple Car Rumor Roundup." On March 8, 2017, 9to5Mac published "Apple Car: Everything We Know About Apple's Rumored Electric Car."

Apple's success with the iPod and the iPhone, coupled with Apple's deep pockets, continue to intrigue investors, though many naysayers abound, having become impatient about the "next big thing."

The question remains: What will be Apple's next attempt at disrupting an industry? I have no insight about what its next initiative might be, but its capacity to continue to be a disrupter is one reason I'm long Apple.

Apple is committed to a dividend

Apple's dividend history is relatively short. And, while Apple has shown a stronger commitment to share buybacks, it has indicated that a dividend will continue to be part of its future.

Some companies are clear and transparent about their dividend policy. I would welcome a clear dividend policy (i.e., a percentage range of earnings per share), but Apple plays the dividend card close to its vest. One reason I'm long Apple is its financial capacity to pay a significant and steadily growing dividend.

I'm long Apple because it has a stellar, AA+ credit rating from Standard & Poor's.

Apple is a major presence in a dominant industry

Technology is 21.74% of the US equity market, by far the largest sector. Apple continues to show impressive long-term growth, even though FY 2016 was Apple's first year to show an earnings decline. Technology will continue to be a major factor in moving the economy and society. Apple is poised to continue to be a major presence in this industry.

F.A.S.T. Graphs

(Graph from F.A.S.T. Graphs)

I don't recall seeing a F.A.S.T. Graph where the stock price (black line) is so far below the "normal P/E" (blue line).

For about 18 months in the recent past, Apple's market price was well below the "fair value" line represented by a 15 P/E, but it has now moved slightly above the fair value line.

Apple has a relatively low 33% debt-to-capitalization level. The graph indicates that Apple's stock price is sitting near its all-time high.

Better Investing

(Company research from Better Investing)

The 5-year data provided by Better Investing indicates that Apple's high yield was 3.0% at one point during 2013. The current yield is a relatively low 1.6%. Apple is expected to announce a dividend increase this month.

The current P/E of 16.7 is well above the 5-year average P/E of 12.8.

Simply Safe Dividends

Simply Safe Dividends provides a helpful snapshot of Apple's safety, growth and yield, showing that for safety and growth, Apple is above the 90th percentile of corporations, but with a relatively low yield.

(Safety, Growth and Yield table from Simply Safe Dividends)

Tim Cook

Apple's current Chief Executive Officer is Tim Cook, who joined Apple in 1998 and succeeded Steve Jobs as CEO after Jobs' death in 2011. Prior to serving as CEO, Cook was Apple's Chief Operating Officer. Earlier, he had a 12-year career at IBM, then he served as COO at Intelligent Electronics and finally (for six months) at Compaq as Vice President of Corporate Materials, procuring and managing product inventory. As COO of Apple, Cook was recognized as the skilled manager of Apple's global supply chain.

(Photo of Apple CEO Tim Cook from Apple website)

Apple is a top 5 holding

Apple is a top 5 holding in my retirement income portfolio, in recognition of its strong AA+ S&P credit rating, its history of earnings growth (2016 notwithstanding), its (admittedly brief) history of dividend growth, its leadership position in technology and its strong cash position.

Here are the top 20 positions in the portfolio as of March 17, 2017:

Company Tick Price %Port Div Yield %Inc Basis S&P CCC
Jnsn & Jn (NYSE:JNJ) $128.05 3.8% $3.20 2.5% 2.6% $67.60 AAA 54
3M (NYSE:MMM) 192.36 3.5% 4.70 2.4% 2.4% 149.16 AA- 59
Microsoft MSFT 64.89 3.5% 1.56 2.4% 2.3% 48.35 AAA 15
Apple AAPL 139.91 3.4% 2.28 1.6% 1.6% 104.78 AA+ 5
Pfizer (NYSE:PFE) 34.32 3.4% 1.28 3.7% 3.5% 29.66 AA 7
Procter&G (NYSE:PG) 91.00 3.3% 2.68 2.9% 2.8% 78.47 AA- 60
AutomaticD (NASDAQ:ADP) 105.10 3.2% 2.28 2.2% 2.0% 92.59 AA 42
Wal-Mart (NYSE:WMT) 69.89 3.2% 2.04 2.9% 2.6% 63.59 AA 44
Merck (NYSE:MRK) 63.90 3.1% 1.88 2.9% 2.6% 55.03 AA 6
Coca-Cola (NYSE:KO) 42.04 3.1% 1.48 3.5% 3.0% 42.46 AA- 55
Cisco (NASDAQ:CSCO) 34.24 2.5% 1.16 3.4% 2.4% 25.57 AA- 7
Roy Bk Can (NYSE:RY) 72.59 2.3% 2.49 3.4% 2.2% 61.24 AA- 6
Toronto D (NYSE:TD) 49.50 2.2% 1.80 3.6% 2.3% 46.04 AA- 6
General El (NYSE:GE) 29.88 2.2% 0.96 3.2% 2.0% 27.47 AA-
Nestlé (OTCPK:NSRGY) 77.47 2.2% 2.32 3.0% 1.8% 72.73 AA- 20
Colgate P (NYSE:CL) 73.90 2.2% 1.60 2.2% 1.3% 69.80 AA- 53
Int Bus M IBM 175.65 2.1% 5.60 3.2% 1.9% 137.09 AA- 21
Unilever (NYSE:UL) 49.94 2.1% 1.42 2.8% 1.7% 40.84 A+ 20
Grainger (NYSE:GWW) 243.97 2.1% 4.88 2.0% 1.2% 228.55 AA- 45
Texas Instr (NYSE:TXN) 82.20 2.0% 2.00 2.4% 1.4% 55.02 A+ 13
Total 55.4% 43.5%

The Future

Apple will soon move its headquarters to a 175-acre "Second Campus," which was named Apple Park in Cupertino, California. The company said it will take over six months to move 12,000 employees into the new site and that some construction will continue during the summer.

The new headquarters is a statement of Apple's confidence in its future growth. It's an open question whether Apple will be able to maintain its leadership position in technology. Some skeptics see it as a "one trick pony," with the iPhone generating about 60% of Apple's 2016 sales. Will it go the way of IBM, which has managed to provide dividend growth in the midst of steadily declining sales? Or, will it find new energy, as Microsoft seems to be doing?

(Photo of Apple's Second Campus from MacWorld)

Tim Cook begins his seventh year as Apple's CEO. He is emerging as a significant leader in his own right, even though he is yet to be identified with a "next big thing." He has been a solid leader, even if he hasn't infused the company with new energy, as Microsoft's Satya Nadella has done. The creative legacy and marketing savvy of Steve Jobs will be forever in the background of Apple, even as Cook and future company leaders seek to continue Apple's innovations and industry disruptions.

(Apple logo with Steve Jobs profile from applelogo.net)

My goal is to produce about one article per week, usually about one of the holdings in my retirement portfolio. You can access previous articles here.

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Your comments are an important part of my learning process. We are co-learners. I'm grateful for my SA colleagues and friends.

It's not my intent to advocate the purchase or sale of any security. I offer articles and blogs to provide ideas for stocks to study and to share a journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Disclosure: I am/we are long AAPL, JNJ, MSFT, MMM, PG, PFE, MRK, ADP, WMT, KO, CSCO, GE, IBM, RY, TD, NSRGY, GWW, CL, UL, TXN, PSA, VFC, SO, WEC, PPL, DUK, GPC, BCE, VTR, O, BIP, EPD, AGR, WPC, BEP, BIF, HASI, MRCC, PEGI, APLE, VTI, VEA, VWO, VYM, VOE, VNQ, VPU.

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.

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