Analysis Overview – Apple (NYSE: AAPL) is unlikely to grow sales or earnings at a scorching pace in the coming years, but the stock is worth considering for value creation through dividends and buybacks.
Apple On Buyback Spree – Apple has bought back shares worth $35 billion in LTM and $103 billion in the last five years. This is the largest buyback (LTM and 5-years) with Microsoft a distant second with buybacks of $16 billion and $44 billion for the period under discussion.
Dividends Will Grow – For 1Q16, Apple reported operating cash flow of $27.5 billion with the company using $9.8 billion for dividends and buybacks. Considering capital expenditure of approximately $4.0 billion for the quarter, Apple still had $10.8 billion in remaining cash. This leaves room for meaningful increase in dividends (including special dividends) and further acceleration in the buyback program.
Apple Is Attractively Valued – For the year ending September 2016, analyst estimates suggest that Apple is likely to report EPS of $9.01. At current market price of $106, Apple is trading at 11.8 times FY16 earnings. The table below gives the company’s likely PE, the IT sector PE and PE for the broad S&P 500 index.
While the forward PE for the S&P 500 index is sourced from S&P database and the forward PE for Apple is calculated, the forward PE for the IT sector is based on the following assumption – For 2015, the S&P 500 IT sector index reported EPS of $33.86 as compared to EPS of $36.1 for FY14. While EPS declined in FY15, I have assumed that FY16 EPS growth is 10% and this implies EPS of $37.2.
It is clear that Apple trades at an attractive forward valuations. While Apple is not a growth stock, the valuations are still attractive considering aggressive buybacks and dividends. Further, Apple has cash glut of $216 billion as of 1Q16.
Product Launch Catalyst – Apple is holding a product launch event today and it remains to be seen what the company has to offer. The Telegraph reports that Apple is expected to release a new range of products, including a new 4-inch iPhone, a smaller version of the iPad Pro, and a new set of designs for the Apple Watch. While details are awaited, Apple will continue to provide innovative products in 2016 and beyond. These products will serve as catalyst for earnings bump-up every now and then.
Conclusion – Don’t expect Apple to be growing revenue and earnings at a robust pace. However, expect the company to continue to innovate and drive shareholder value through new products, share buybacks and increasing dividends. The valuations are attractive and fresh exposure to the stock can be considered at current levels.