Wednesday, February 10, 2016

Recent Buy – Apple Inc

First purchase of 2016! Well, that didn’t take long…the year started off with one of the worst starts in the stock market going back a decade or so. With the depressed market comes great opportunity to buy quality assets and putting my money to work. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to invest at regular intervals and build my passive income over the course of time. In a sort of ways, I am building my own pension, hoping to get to a point where I can simply live off my dividends without touching my principal investment.

Last week, I added to my position in Apple Inc (AAPL) with 10 shares @ $104.28. The stock yields 1.99% adding $20.80 to my annual dividend income.

Recent Buy Decision

  • Apple needs no introduction whether you are an investor, retailer or consumer. It’s the world’s largest company and is a money making machine with its tremendous pace of innovation that continues to capture everyone’s imagination. New products just keep coming year after year and the demand exceeds all expectations each year.
  • They have been able to command higher prices and the customers are happy to pay for it. Moreover, the brand loyalty is spectacular with some reports claiming upto 90%. The company does not compete in trying to race to the bottom. A luxury brand that does things in style and customers, including yours truly, is happy to pay for it.
  • Lots of new frontiers still exist for Apple to take a crack at – such as health (which is one of the main focus points in the new watch product), television, media, car etc.
  • Apple seems to be building a robust Services business. I shared a detailed look at the business segment in this article. I think this sector will continue to grow and be a bigger part of the company going forward.
  • Apple has come of age and has become a more mature company and the dividends have started flowing to shareholders. Apple is also becoming more shareholder friendly – even listening to activist investors like Carl Icahn and tweaking their buyback plans.
  • Apple having only started issuing dividends in 2012 started raising them out of the gate. The dividend grew by 15% in 2013, 8% in 2014 and 10.6% in 2015. The current payout ratio is a low 21.4% and considering the huge cash position that Apple holds (albeit overseas), increasing those dividends in the future should not be a problem.
  • Apple is able to tap into the bond market to raise money at record low yields (esp with that AA+ credit rating) – taking advantage of the low yield rates in Europe. It is interesting to note that Apple has issued bonds in EU as of late.
  • The valuation is extremely attractive and I think the stock is severely undervalued. A low P/E of 11.45, Forward P/E of 9.85, PEG of 0.82, the company is a proven cash machine (revenues last year exceeded $50B/quarter and overall earnings topped $52B annually – which translates to $1B/week of profits!). Going forward, revenue is expected to grow 3.7% in FY16 and 6.0% in FY17. Earnings are expected to grow 5.6% (FY16), 9.8% (FY17) and continue to grow next 5-yr at 13.92% annually.


  • Some speculators suggest that the best days of Apple are behind it (I vehemently disagree on this point) as the sales are expected to stagnate.
  • On the technology front, it constantly has to stay ahead of competition from other tech companies. In addition, the company always finds itself in court battling others over patent infringements. Consumers also seem to have become numb to new products, features and announcements.
  • Apple continues to rely on debt and use borrowed funds to fund its buybacks as the cash pile rises internationally. How will the company use the international cash pile remains unclear.
  • Curse of the Dow? Since the stock was listed in the DJIA, the stock price has languished. Will it be able to break out to its real value?
Full Disclosure: Long AAPL. My full list of holdings is available here.

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