Should you invest in Apple? As the market eagerly awaits the September 9th launch of a suite of new Apple products, this question occupies the airwaves. Back in April, I wrote that Apple looked attractive despite negativity about the company. Below is an updated objective look at Apple based on two key criteria for evaluating a stock: valuation and shareholder orientation. These two variables are more helpful for predicting future performance than prognostications about products and forecasts of earnings growth rates (which is where all the Apple attention seems focused).
The iPhone 6 and iWatch sound great, but they don’t matter nearly as much as valuation or shareholder yield. Let’s look at how Apple stacks up by these factors versus the rest of the market (hint: pretty damn good).
Value
Apple went from a very expensive market darling focused on growth, to a very cheap market laggard with significant dividend and share repurchase programs.
Between 2010 and 2012, perception was that Apple was the greatest company in the world. In 2010, Apple was more expensive than 75% of the market based on a combination of simple measures like price-to-earnings, price-to-sales, and price-to-cash flow. Now, in 2014, it is cheaper than 90% of companies, based on those same measures. Look how quickly the change happened. Market perception can turn on a dime.
Valuation has been a powerful factor for predicting future returns throughout history. In fact, the cheapest 10% of stocks, on average, have outperformed the market by nearly 6% per year since 1963. Today, Apple sits in this cheapest valuation bucket.
Shareholder Orientation
The other key change in Apple (from the investor’s perspective) is its orientation towards its shareholders. For years, it issued new shares, diluting existing shareholders (shown as negative shareholder yield in the figure below) and paid no dividends. They’ve since pulled a 180, buying back a huge number of shares and paying a regular dividend. Again the change happened fast.
Shareholder yield, just like valuation, has also been a powerful predictor of future returns. Companies that pay impressive dividends and buyback significant amounts of their share have outperformed the market by roughly 4% per year since 1963. Again, Apple sits in the best group by shareholder yield today.
Apple Inc. vs. $AAPL
The consensus earlier this year was that Apple, the company, has less potential than it did a few years ago, but history suggests that its stock has much more potential than it did a few years ago.
Apple Inc., the company, has taken its licks since it first peaked at $700 in 2012—but has come roaring back. $AAPL, the stock, has transformed in ways that should make investors take notice. Investors should always buy cheaper companies that reward their shareholders rather than expensive stocks dilute them. Of course Apple itself may flounder and underperform the market, but the odds are that a large basket of stocks with similar characteristics (cheap valuations, high shareholder yields) will do very well over the long term. In anticipation of September 9th, remember that products and earnings growth rates may be exciting, but value matters more.