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Company history, Economy and Competition
What is the recent history of the company?
Apple Inc. is a multi-national company founded by Steve Jobs and Steve Wozniak in 1976 in California, USA. Jobs and Wozniak were high school friends who dropped out of college together to venture into the computer technology industry in 1976. The company started off with the launch of a simple Apple I computer in 1976 but has now gained enough momentum to be labeled as the most admired company and valuable brand in the world. The Company now offers “digital content and applications through its Internet Services, iOS, Mac, Apple Watch iPhone, iPad and iPod touch devices” (Form 10-K ANNUAL REPORT Apple Inc.).
How has the current state of the economy affected the performance of the company?
Global economic forces pose a significant risk on the company’s business as a whole. Adverse conditions such as unemployment, global tension, politico-legal forces, credit policies, foreign exchange fluctuations, and fuel and energy prices are several such factors which influence the demand and supply of Apple’s products worldwide. Such conditions also tend “to increase the volatility of the company’s stock price” (Wikinvest.com).
Despite this, Apple Inc.’s performance has been exceptional since the financial crisis of 2008. The company has also managed to increase its total net sales by 28% in 2015 as compared to 2014. The total net income of the company has also increased since 2014 however; it is much lower as compared to its net income in 2011 and 2012. The stoop in net gains since the past few years can be contributed to the fact that the company has now shifted its attention towards “dousing its investors with cash via dividends and buybacks” rather than “the perpetual expectations game with investors” (Phillips).
What is the nature of the industry and the major competitors?
Apple Inc. belongs to the computer technology and electronic equipment industry. The company engages in the manufacture and design of high-end mobile and computer peripherals and equipments. “The company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications” (Form 10-K ANNUAL REPORT Apple Inc.).
The company faces tough competition from highly resourced and experienced market participants such as Google, Samsung, Microsoft, IBM, Sony and Lenovo. All these competitors are corporate giants in the computer technology industry and thus, pose a major threat to Apple.
Debt Structure
What is the debt structure of the company?
The company’s capital structure contains approximately 59% debt and 41% equity. The debt portion of the capital contains both long term and short term liabilities. As per the latest audited balance sheet of the company, the company raised a total of $8,499 million in commercial papers. Of these, $2,191 million were raised solely in the year 2015 for general corporate purposes. The company’s debt structure also contains fixed and floating rate Notes worth $55,963 million at the previous financial year end. These Notes are majorly denominated in the US dollar, Australian dollar, British Pound, Euro and the Japanese Yen. The company raised a total of $26,976 million Notes in 2015 alone.
Is the amount of debt in line with industry averages?
As on September 2015, the total debt of the company was $64,462 million and the total shareholder’s equity was $119,355 million. This indicates that the debt to equity ratio of the company is 0.54. As compared to the industry average of 84%, the leverage position of the company is quite favorable. Moreover, a debt to equity ratio lower than 20% is considered acceptable for all companies in general. In this regard, Apple’s leverage position is quite desirable for investors and other stakeholders (NASDAQ.com).
What are the debt ratio, debt to equity ratio, and the times interest earned ratio?
At the end of financial year 2015, the company’s total debt was $64,462 million and total equity was $119,355 million. This implies that the company’s debt ratio was 0.35 and the debt to equity ratio was 0.54. The company’s total earnings before interest and taxes (EBIT) were $73,248 million and the total interest expense was $733 million. This indicates that the times interest earned ratio for 2015 was 99.93.
What is your analysis of the above debt ratios?
A debt ratio of 0.35 indicates that the company has employed only 35% of borrowed funds in its capital structure. The company thus, relies heavily on its shareholders’ money rather than on borrowed funds. However, an increase in debt ratio since 2013 is indicative that the company has started relying on borrowings more than the previous years. A debt to equity ratio of 0.54 indicates that the total debt of the company is 54% than that of its shareholder’s funds. An increase in debt to equity ratio is also evident since the company started borrowing more funds since 2013. A times interest earned ratio of 99.93 indicates that the company’s ability to cover its interest expense with its EBIT is 99.93 times. This is quite desirable for the company since it can repay its interest expense with its pre-interest and tax earnings with ease. However, a decreasing trend since the past two years indicates that the company’s ability to cover its interest expenditure has decreased substantially.
How does the level of debt affect your opinion of the company?
The level of debt which the company has employed is quite desirable for the stakeholders. Lower gearing in the capital structure results into lower cash outflows in the form of interest and debt repayments. However, lower interest expenses result into increased tax payments. Despite this, lower gearing allows Apple to utilize its saved cash flows for paying dividends to its shareholders which is quite profitable for the company in the long run.
Raising Capital with Equity
When was the last time the company issued new shares of stock?
The last time the company issued common stock was in 1980 when it took out its Initial Public Offer (IPO). The company’s stock has been split four times since then. It receives net tax benefits annually which it shows as an increase in its common stock. It thus issued 37,624,000 shares in 2015 and raised a total of $543 million as cash benefits. The company has a financial strategy to repurchase stock instead of issuing them. It repurchased a total of worth $35,253 million in the latest fiscal year.
Can you tell what it did with the proceeds of the stock issue?
The net proceeds earned by the company from issue of common stock in 1980 were used for the expansion of business at that time. The company was in its developing stages and funds were required for investing in high-yielding projects. However, the cash flows earned out of tax benefits worth $543 million which are shown as issue of common stock by the company were not used for any specific purpose in 2015 except for the purposes of repurchase of its common stock. The company declared to repurchase around $140 billion of its common stock in 2015 and has spent around $30 billion for the same. The company uses most of its funds for buying back its shares from the market.
The main motto behind utilizing funds for buying back shares is to reduce the number of shares available in the market in order to avoid dilution of ownership and to increase the market price per share. The program has been quite successful as “Apple's stock price is more than 60% higher than when Apple began buying back its shares in late 2012” (Cybart).
Has it purchased any shares back for Treasury Stock, and if so, what price did it pay?
No shares have been repurchased from shareholders for Treasury stock by the company till date.
Beta
What is the company’s beta and what does that mean in relation to the rest of the market?
Apple Inc has a beta of 1.06 times. Beta is a measure of a security’s volatility with that of the market . Beta of 1 indicates that a company’s stock price moves in the same direction and with the same volatility as that of the market. Hence, a beta of 1.06 indicates that when the market moves up, the company’s stock moves up 0.06 times more than the market and vice versa.
What is the estimated Weighted Average Cost of Capital for this company?
The estimated weighted average cost of capital of Apple Inc. comes to 9.22%. It indicates that the company has the ability to generate positive returns from its investments. A WACC of 9.23% shows that the company’s ability to generate returns from investments is much higher than what it costs to raise capital for such investments (Gurufocus.com).
3. Has the company made economic profits or losses in the past two years?
Apple Inc. has been able to generate substantial profits since the past two years. The total net income of the company in 2015 was $53,394 million, $39,510 million in 2014 and $37,037 million in 2013. The company’s net profit ratios in 2015, 2014 and 2013 have been 22.85%, 21.61% and 21.67 % respectively.
4. What were the driving projects or strategies that caused the profits or losses?
Generating continuous economic profits can be contributed to the company’s ability to utilize its assets and share capital effectively. The company has also started using differentiation strategy to lure more customers and strategic partners to its business. The driving strategy of the company has always been to design outstanding products, provide personalized services and high quality products. “As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Internet Services, which allows customers to discover and download digital content” (Form 10-K ANNUAL REPORT Apple Inc.). Another strategy recently adopted by the company has been to increase its capital returns through massive stock repurchases.
Dividend Policy
What is the company’s dividend policy?
Apple Inc. has a policy of paying cash dividends to its shareholders in moderation. The company paid a dividend of $1.98 per share in 2015 which was after an increase of 11% in the last quarter of 2015. Although the company managed to earn substantial profits and cash flows in the last fiscal year, the company maintained its policy of not paying huge dividends to its shareholders in 2015 also. The company plans to execute and expand its extensive capital repurchase program till the fiscal year 2017 through dividends.
When did it last pay a dividend, what was the dividend and price per share of stock?
Apple Inc. paid the last dividend to its shareholders in the last quarter of 2015. It paid a dividend of $0.52 per share which was equal to $2,950 million in total in the fourth quarter. The price per share of stock had a range of $92 to $132.97 in the fourth quarter of 2015. The company paid a total of $11,431 million as dividends in the fiscal year 2015.
What was the dividend payout ratio?
The dividend payout ratio of Apple Inc. was 22.30% in 2015. The payout ratio reduced substantially from 28.70% in 2014 to 22.30% as the company had carried out a stock split in 2014. The company has been increasing its dividend rate since the past few years and is trying to maintain an annualized increase in dividends by 11%.
Do you feel it is using its cash wisely as far as dividend policy goes?
The company has been very wise in distributing cash in the form of dividends. Since the company has a moderate dividend policy, it would be safe to say that the company is free to utilize them on other yielding investments. Even if Apple Inc. increases its dividends by a constant rate of 11%, it would still have sufficient cash to pay dividends to its shareholders after investing in major projects.
Stock Price
What is the Stock Ticker symbol, current market price, ROI, ROE, PE ratio?
The Stock Ticker symbol for Apple Inc. is AAPL. The current market price prevailing as on 26th January 2015 is $100.12. The company has a Return on Investment (ROI) ratio of 39.74% and a Return on Equity (ROE) ratio of 46.25%. The company has a Price Earnings (P/E) ratio of 12.45 times.
How has this company down with the above ratios for the past two years?
The company’s ROI was 38.28% in 2013 and 34.98% in 2014. It indicates that the company’s ability to utilize its invested capital for generating returns declined in 2014 but improved in 2015. The company had an ROE of 30.64 % and 33.61% in 2013 and 2014 respectively. This increase is indicative of the improved capability of Apple Inc. to make use of its equity share capital to generate greater returns. The company’s P/E ratio was 12.75 and 15.60 in 2013 and 2014 respectively. It indicates that the Price earnings ratio reduced substantially in 2015.
How much has the stock priced moved since you have been tracking it?
Apple Inc.’s stock price has been moving dramatically since 2011. The stock price moved around $50 till the end of the calendar year 2010. With fluctuating trends, the stock moved upto $60.96 by the next year end. However, it showed a massive improvement in 2012 where it reached a high of $100.72 during the year and closed at $76.02 by the end of the year. 2013 was a slower year for Apple Inc. as the stock price stayed around $75 and $82 during the year and finally closed at $80.14. During 2014, however, the company was able to achieve a high stock price of $119.75 with a final closing at $110.38. The stock price moved likewise in 2015 recording an all time high price at $134.54 and finally closing at $105.26 on December 31, 2015.
Have any major events had a major impact on the company’s stock performance?
Apple Inc. recorded a massive jump in the stock price in 2014 after announcing a 7 for 1 stock split. Another major event leading to the increase was the partnership with IBM and recording “its biggest deal of the year with the purchase of Beats for $3 billion” (Reeves). Furthermore, its master stroke has been the latest capital repurchase program since this has allowed the stock price and the earnings per share to increase manifolds. As a result, investors are willing to buy more of the company’s stock which is in turn pushing the stock price upwards.
What is the latest consensus by analysts whether to buy, hold, or sell the stock?
As per the latest market trend, an upward movement in the stock price of Apple’s stock is quite evident. Analysts believe that buying and holding the stock would be the most preferable option for investors. Selling the company’s stock is not a desirable option if investors wish to earn profits in the long run.
What is driving the analyst’s opinions and do you agree or disagree with them.
Analysts believe that after the stock split in 2014, Apple’s stock has become easier for investors to buy. Moreover, they believe that “Apple is an extremely solid company with a great management team and that is one reason to buy the stock and hold it for the long term” (Alan). Moreover, Apple’s stock price is at an all time high and has also been showing a bullish trend since the past five years. A sudden decline in the stock price is not foreseeable, thus, I would agree that it would indeed be beneficial to buy and hold the stock for the long run.
Works Cited
Alan, Bruce. "IS IT TOO LATE TO BUY APPLE STOCK AFTER THE SPLIT?". Startbuyingstocks.com. N.p., 2016. Web. 26 Jan. 2016.< http://startbuyingstocks.com/is-it-too-late-to-buy-apple-stock-after-the-split/>
Cybart, Neil. "Apple Is Buying Back Shares Like There's No Tomorrow". Above Avalon. N.p., 2015. Web. 27 Jan. 2016. <http://www.aboveavalon.com/notes/2015/11/2/apple-is-buying-back-shares-like-theres-no-tomorrow>
Form 10-K ANNUAL REPORT Apple Inc. 2015. Web. 24 Jan. 2016. <http://files.shareholder.com/downloads/AAPL/1021812650x0x861262/2601797E-6590-4CAA-86C9-962348440FFC/2015_Form_10-K_As-filed_.pdf >
Gurufocus.com. "Apple Inc (AAPL) Weighted Average Cost Of Capital (WACC)". N.p., 2016. Web. 26 Jan. 2016. <http://www.gurufocus.com/term/wacc/AAPL/Weighted%252BAverage%252BCost%252BOf%252BCapital%252B%252528WACC%252529/Apple%2BInc>
NASDAQ.com. "David Dreman Guru Analysis Of Apple Inc. (AAPL)". N.p., 2016. Web. 24 Jan. 2016. <http://www.nasdaq.com/symbol/aapl/guru-analysis/dreman>
Phillips, Matt. "The Recent History Of Apple In One Chart". Quartz. N.p., 2014. Web. 24 Jan. 2016. <http://qz.com/222974/the-recent-history-of-apple-in-one-chart/>
Reeves, Jeff. "9 Reasons Apple’s Stock Will Keep Rising". MarketWatch. N.p., 2016. Web. 26 Jan. 2016. <http://www.marketwatch.com/story/9-reasons-apples-stock-will-keep-rising-2014-07-16>
Wikinvest.com. "Economic Conditions Could Materially Adversely Affect The Company. For Apple (AAPL)". N.p., 2016. Web. 24 Jan. 2016. <http://www.wikinvest.com/stock/Apple_(AAPL)/Economic_Conditions_Materially_Adversely_Affect>
