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Chuck Carnevale
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Charles (Chuck) C. Carnevale is the creator of F.A.S.T. Graphs™. Chuck is also co-founder of an investment management firm. He has been working in the securities industry since 1970: he has been a partner with a private NYSE member firm, the President of a NASD firm, Vice President and Regional... More
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  • Apple Does Not Need Its Cash To Grow As Much As Its Shareholders Need It To Spend 12 comments
    Mar 19, 2012 2:43 PM | about stocks: AAPL

    Learning From The Past

    With all the media attention, most everybody is now aware that Apple (NASDAQ:AAPL) has decided to use their prodigious cash hoard by initiating a stock buyback and dividend for the first time in their history. Regarding the stock buyback, their announcement indicates that they would share their cash holdings by buying back shares over the next three years. According to company statements, the primary objective of their share buyback program is to offset the impact of employee stock options and equity grants. Regarding the dividend, they announced a $2.65 quarterly payment starting in July of this year which represents a current yield of approximately 1.8%.

    At this stage of the game, it remains uncertain as to whether Apple (AAPL) will continue to pay this dividend on a permanent basis, or that, as they indicated with their stock buyback program, only pay a dividend on a temporary basis. Assuming that CEO Tim Cook is correct in stating that Apple (AAPL) does not need all of its cash hoard, and/or annual cash flow generation to run the business, the more permanent dividend policy maybe the logical outcome.

    The following historical F.A.S.T. Graphs™ looks at Apple from the perspective of price correlated to earnings. Note that the light blue shaded area at the end of the graph indicates the recent dividend announcement. We are showing two quarters of dividends for 2012 followed by four total dividend payments for 2012 (assuming two quarters at $2.65) a $5.30. However, since Apple is currently not paying a dividend, and will not until July, we are not showing the current yield to the right of the graph at this time.

    With our next historical F.A.S.T. Graphs™, we are looking at Apple from the perspective of price and free cash flow only. The definition of free cash flow used to draw the following graph is as follows: This concept is Operating Activities minus Net Cash Flow minus Cash Dividends minus Capital Expenditures. This is divided by Common Shares Outstanding. Of course, there have been no dividends subtracted out of this mnemonic as of yet. On the other hand, the graph clearly validates CEO Tim Cook's position that the company does not need all of its free cash flow generation in order to run the business.

    With our next historical F.A.S.T. Graphs™ we look at Apple from the perspective of earnings, price and dividends as we did with our first graph. However, we have now added cash flow per share which is defined as follows: This concept is Cash Flow divided by Common Shares Outstanding. What is most astounding about this particular graphic is how closely cash flow and earnings correlate with each other.

    With our final historical F.A.S.T. Graphs™, we reviewed Apple from the context of price, earnings and dividends correlated with Operating Activities minus Net Cash Flow. This cash flow mnemonic is defined as follows: This mnemonic represents the net change in Cash from all items classified in the Operating Activities section on a Statement of Cash Flows. This item includes changes in operating assets and liabilities. Increases in cash are presented as positive numbers. Decreases appear as negative numbers.

    (Follow this link to a free, live, and fully functioning F.A.S.T. Graphs™ on Apple. Run this "tool to think with" through its paces. Draw graphs displaying 2 to 20 years of history. Discover how this tool dynamically re-evaluates valuation based on the company's earnings and price relationship.)

    Looking to the Future

    The following earnings and return calculator graph, followed by the earnings yield estimator table looks at Apple's potential going forward. With these two forward-looking F.A.S.T. Graphs™ tools, we can run some estimates and forecasts of what Apple's future dividend policy might bring. For conservative purposes, we have held the current dividend announcement level at $10.60 over the next three years. This is only speculation on our part, assuming that Apple is looking at dividends the same way they are looking at stock buybacks.

    The estimated earnings and return calculator is based on 36 analysts as reported to Capital IQ who expect Apple will grow their earnings at the rate of 19.5% over the next five years. The reader should note that this is materially less than the more than 60% per annum growth that the company has achieved over the past 5+ years. Consequently, it's at least possible that Apple will continue to grow faster than what the analysts are currently forecasting.

    The 10-year earnings yield estimates table should be used in conjunction with the above estimated earnings and return calculator. However, since this table was designed to compare earnings and dividends to the riskless return available from the 10-year Treasury bond, it extends out all the way to calendar year 2021. This table provides a hypothetical estimate of the potential growth yield (yield on cost) that the new dividend growth stock Apple may offer prospective investors.

    Summary & Conclusions

    Apple (AAPL) has been one of the most powerful growth stories in the world since Steve Jobs returned to the company in 1997. As you can see from the historical F.A.S.T. Graphs™ above, it took Steve a few years to get the company growing again. However, once his ideas took hold, earnings growth has been nothing short of spectacular. Only time will tell if Tim Cook is capable of filling his big shoes. Apple's decision to use their cash hoard to buy back stock and pay dividends is in stark contrast to Steve Jobs' views. However, no one can really say whether or not Steve would have agreed to and supported these latest moves, in light of the clamor and pressure that investors were placing on the firm.

    Nevertheless, it seems clear that Apple will continue to be a strong growth story into the foreseeable future. How long that will happen, only time will tell. For additional insights into my feelings on Apple after Steve Jobs' untimely passing can be found by following this link to an article I published in October of 2011. Although it is somewhat odd to think of Apple the dividend growth stock instead of Apple the consummate pure growth stock, the dividend income is most appreciated. Like many other investors, I do not believe that Apple needs all of their powerful cash flow generation to fund future growth. Therefore, sharing their cash with shareholders is a most welcome occurrence. Nevertheless, I continue to believe that Apple represents an extremely undervalued technology holding that now offers an attractive, and hopefully growing, dividend income stream.

    Disclosure: Long AAPL at the time of writing.

    Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

    Disclosure: I am long AAPL.

    Stocks: AAPL
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Comments (12)
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  • Robert Allan Schwartz
    , contributor
    Comments (21305) | Send Message
    Why would AAPL begin a stock buyback at the worst possible time, i.e. when its stock is at an all-time high? That doesn't make sense. :-(
    20 Mar 2012, 09:41 AM Reply Like
  • Chuck Carnevale
    , contributor
    Comments (7444) | Send Message
    Author’s reply » Robert,


    Thanks for your observation. However, IMHO AAPL is still very attractively valued based on its earning power. It may be at an all time high, but I for one believe that Mr. Market has been and still is undervaluing its shares. A 16.8 PE versus a 19.5% expected growth rate against the backdrop of a 35% historical growth rate seems reasonable and achievable.


    My $.02,


    20 Mar 2012, 10:46 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (21305) | Send Message
    I see - you expect it to go up, so a buyback at its price today will look (in retrospect) like a good buy.




    20 Mar 2012, 11:48 AM Reply Like
  • Ramon Vredeling
    , contributor
    Comments (603) | Send Message
    Totally agree Chuck, I wrote an article on Apple yesterday as well - "The Battle Rages On: Apple Feels The Heat, But Keeps The Lead": -, and after reading some PM's from (mostly retail) investors in my inbox, it seems many still find it difficult getting passed a $400, $500 and now $600-number.


    Apple is still only trading at around 12-13 times earnings estimates for 2012, and regardless of the share price that's still a low multiple for a high growth stock. As long as investors aren't getting ahead of themselves with expectations for how robust iPad3 sales and later in the year iPhone5 sales will be, the stock still has more room to run based on both valuation and growth rate.
    20 Mar 2012, 11:54 AM Reply Like
  • montrachet
    , contributor
    Comments (1735) | Send Message
    I do agree with Mr. Carnevale, AAPL is extremely undervalued by any measure.
    As a shareholder the only sour point about AAPL was the inefficiency of cash management, I have today a sense of confidence, satisfaction and contentment.
    I did buy more shares after their announcement of a Div and a buyback, making it a important component of my portfolio.
    I am seriously considering selling my ABT position and transferring the money into AAPL to make it one of my pillar position.
    I believe AAPL is the best and the most undervalued company out there! Credit Suisse is already predicting a $12.65 Div for next year, a 19% increase from what was announced and a payout ratio of 20% which is in their mind very conservative.
    The product pipeline is grandiose with an "Ibank" rumor that would in a way seal the deal!
    My Icents!
    25 Mar 2012, 08:11 AM Reply Like
  • richjoy403
    , contributor
    Comments (14036) | Send Message
    Thanks Chuck for the update on AAPL
    I am quite satisfied with my strategy of holding only dividend-paying stocks (though I sometimes spot very tempting opportunities in non-dividend stocks, such as AAPL).


    Thus I am very pleased by the new dividend in a stock I have long wanted to own, and though AAPL is priced below fair-value, I still intend to start to build a position after the current "price pop" subsides on the general market pull-back I expect at any time...or this summer latest. [I like to buy at on-sale prices]
    I also have a question...In my regular subscription, I was able to construct a list of my portfolio stocks and run through them weekly without re-entering the symbols. That feature has disappeared...why?
    22 Mar 2012, 07:16 AM Reply Like
  • richjoy403
    , contributor
    Comments (14036) | Send Message
    Chuck -- I have sent Polly a msg regarding my problem. I expect she will pass it along to the technical team.
    22 Mar 2012, 09:13 AM Reply Like
  • Ramon Vredeling
    , contributor
    Comments (603) | Send Message
    RJ, the only issue I see with investors waiting for this 'price pop' to subside, is that with AAPL you have a good chance you won't see that happening anytime soon. At least not in a significant way, even if we were to see a broader market pull-back between May-September for example.


    About 2 years ago, when Apple launched its 1st-Gen iPad, a single Apple share cost approximately $240. Even at that time I had several discussions with people providing me suggestions and reasons on why I should cash-out for a nice return. After all, such a mind-boggling price for 1 share 'must' imply the company/share was over-priced.


    We're now at $600, and based on current and future expected growth, fundamentals, and relative valuation, there seems little reason to assume that the uptrend will not continue. In 2012 Apple is again establishing its dominance with first a much improved iPad(3) and later this year the a new completely redesigned iPhone(5). It remains the clear No.1 in a still fast-growing smartphone and tablet market, with continued high margins on products sold. Clearly well deserved.
    24 Mar 2012, 02:01 AM Reply Like
  • richjoy403
    , contributor
    Comments (14036) | Send Message
    Ramon -- Thank you, your comment reflects a very popular view.


    I offer no factual rebuttal...AAPL is a great stock. I recognize the fundamentals and fair-value price; I also listen to my gut and comfort level.


    In both my past experience and my future forecast..."trees don't grow to the sky". I won't chase it, I believe there will be opportunities for entry on a share price decline due to either Apple-specific problems or general market trends...and if not, there are many tasty fish in the sea.
    24 Mar 2012, 07:46 AM Reply Like
  • ccroot
    , contributor
    Comments (77) | Send Message
    This is an old post, but I ran through the stocks and SAI looked to be cheap on fast graphs and had a good write up on value line. What are your thoughts?
    6 Jan 2013, 08:31 PM Reply Like
  • Chuck Carnevale
    , contributor
    Comments (7444) | Send Message
    Author’s reply » ccroot,
    SAI does look cheap,however, the last few years of earnings performance would indicate further due diligence,IMO.


    7 Jan 2013, 06:36 AM Reply Like
  • ccroot
    , contributor
    Comments (77) | Send Message
    Sorry, I posted to the wrong instablog.
    7 Jan 2013, 08:20 AM Reply Like
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