Apple – A Techno Stock for Dividend Investors

Apple (AAPL) Inc designs, manufactures, & markets mobile communication & media devices, personal computers, portable digital music players and sells a variety of related software, services, accessories, networking solutions & third-party digital content.stock report

-Seven Year Revenue Growth Rate: 40.85%
-Seven Year EPS Growth Rate: 33.64%
-Seven Year Dividend Growth Rate: N/A%
-Current Dividend Yield: 1.67%
-Balance Sheet Strength: Extremely Strong

Overview

While it may seem like that everything has been said about Apple, it is not the case from a dividend growth investing perspective. This is why today, I’ll not only take a look at the fast growing and innovative company that Apple is but more about the future cash distribution machine it will become over the next 10 years.

Business Segments

The strongest asset Apple has is definitely its brand. Apple’s brand is known across the world and for a good reason; all of their products are well designed, well thought out and, most importantly, they interact perfectly in the most beautiful product ecosystem ever created. In this ecosystem, we find the following products:

iPhone, iPad, iPod, Mac, iTunes & App Stores, iCloud, Apple Pay, Apple Watch & Apple TV and Operating System Software. As you can see, Apple wouldn’t be the biggest company by market capitalization if it didn’t sell iPhones:

 

apple product per revenue

 

I like to say that Apple used to sell Macs as it now only represents 11% of its total revenue. The tablet sales have been a concern for AAPL over the past couple of years. Therefore, company results are highly dependent on how many iPhones it sells.

Ratios

Price to Earnings: 16.5
Price to Free Cash Flow: 12.22
Price to Book: 5.92
Return on Equity: 36.70%

Revenue

aapl revenue

Revenue grew at an incredible annualized rate of 29.34% over the past 10 years. The company will probably continue to raise revenues in the future but not at this pace. Over the past three years, the annualized growth has normalized to 5.31% which is still pretty solid.

The product integration increases the volume of sales per client. Therefore, each time Apple sells a product to a new customer, the chance of seeing him buy a second, third and fourth product is very high.

Earnings and Dividends

aapl earnings

As you can see, AAPL is not close to becoming the next aristocrat as its first dividend payment was made in 2012. Pressured by the market and more especially by Carl Icahn, Apple finally accepted to share a part of its ever growing bank account. The rate has been quite modest over the year.

Approximate historical dividend yield at beginning of each year:

aapl historical dividend yield

 

 

 

 

 

 

Due to another stock rally, the stock is currently yielding a relatively small yield of 1.50%. But what I really like about this future dividend grower is the fact that dividend is now increasing significantly each year and the company has plenty of room to continue its growth since the payout ratio is around 25%. You can then expect 10% dividend growth for several years without being worried.

aapl payout ratio

By looking at the previous graph, we are in a better position to appreciate AAPL as a dividend stock. Earnings have grown strongly over the past five years and the current environment will help Apple to rise to new highs. Most importantly, revenues are following a similar trend.

How Does AAPL Company Spend Its Cash?
Well the biggest problem with AAPL is that it doesn’t spend most of its cash. The company is generating an annual free cash flow of $60B. From this cash flow, AAPL distributed 10.5 billion in 2013 and 11 billion in 2014. The company also repurchased approximately for 22 billion of its stock. This means that 30 billion hasn’t been redistributed to investors. I bet you won’t be surprised to find almost 14 billion sitting in cash and another 11 billion in short term securities on its September 2014 balance sheet.

Apple has always remained a very cautious company with its cash. While many dividend investors ignore Apple for this reason (as they expect a higher distribution), I prefer buying a company that will always increase its payout and continue to have a clean balance sheet.

Balance Sheet

Apple’s balance sheet is very strong. The debt on equity ratio is sitting at 1.124 and the company could pay its long term debt in 5 years without blinking. The long term debt on debt income ratio is at 0.4409. You might think AAPL had included a huge goodwill value on its balance sheet since their brand is so powerful but only 4 billion out of a total asset of 231 billion is shown as goodwill. The company has virtually no debt as the long term debt of $29B could be paid off simply by writing a check from short term securities and the cash account.

Investment Thesis

The reason to buy Apple is not because it sells a great smart phone. It is not because tablets and other electronic device will continue to drive consumers to their stores. It is not also because AAPL is continuously innovating with new products or services such as the iWatch and Apple Pay launched recently. Those could all be good reason for a growth investor, but not for a dividend investor.

As a dividend investor, I’ve purchased this stock because of the company’s diversified product ecosystem. Buying an Apple product makes you want to buy another one and build your ecosystem at home. The integration is easy to do and generate efficiency to a maximum. My wife lost her phone not so long ago and I had to do was to pick-up my daughter’s tablet to find it within seconds.

The ecosystem drives the customer to buy more products and repeat purchases over time. Therefore, once their phone, iPod or tablet is up for a new one, many customers will go back to Apple because they know they will be able to sync their new purchase once back home without any headaches.

This ecosystem is the main reason why the company will continue to raise their dividend in the future as it will eventually become a more “stable” business that won’t surge at any moment. The easy money with Apple is definitely gone, but it doesn’t mean it can’t do well in your portfolio.

Risks

As with any techno stocks, AAPL is vulnerable to evolution. In five years from now, we might even not talk about smart phones anymore as consumers will want to buy something else. We saw many techno giants fall for this reason and AAPL is always one fail away to see its profitability drop. This is one of the reasons why it keeps so much cash in hand.

The second risk for this company is its dependence on the smartphone business. The stock rallied recently because sales in China surprised the market and there is a bigger hype since Samsung (it’s main competitor in the smartphone industry) is struggling with its dozen product launches.

Conclusion and Valuation

To value the company, I’ll first start with the historical PE ratio of AAPL for the past ten years:

gpc pe ratio

As you can see, the “new” value for this company is now around 17 to 20 times its earnings. The market has calmed down its expectation and the price is more reasonable. Considering today’s market, the stock seems cheap. It is currently trading near its lowest level since 2005 and the overall market is slightly overpriced. Regardless if the stock price as gone up by about 100% over the past three years, AAPL is not overpriced yet.

In order to have a better idea of its valuation, I’ll use the Dividend Discount Model. I use the table found in my Dividend Toolkit to determine the value based on the dividend paid by Apple. I use a discount rate of 9% since it will become a very stable business in the future and there is lots of cash flow generated by its business model. I expect the dividend to grow by 10% over the first 10 years and then it should reduce its pace to 7%. This gives me a fair value of $127.90.

aapl intrinsic value

 

Here again, the stock seems to be fairly price and maybe slightly under priced.

Since using both methods leads me to the same result; I conclude AAPL is a good buy at $125. The company shows strong growth potential and the dividend payout future for this stock is solid.

Full Disclosure: I hold AAPL in my DSR Portfolio

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Genuine Parts – Strong Company; Overpriced Stock

Genuine Parts Co (GPC) is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical & electronic materials. This dividend aristocrat has an interesting growth model combining small but recurring acquisitions added to internal growth.

-Seven Year Revenue Growth Rate: 3.80% stock report
-Seven Year EPS Growth Rate: 5.72%
-Seven Year Dividend Growth Rate: 5.00%
-Current Dividend Yield: 2.33%
-Balance Sheet Strength: Strong

Overview

Genuine Parts (GPC) was founded in 1928 and is part of the dividend aristocrats. The company has increased its dividend payout for 58 consecutive years. The company shows around 37,500 employees across 2,600 operation sites.

Business Segments

The company is divided into four business segments:

 

gpc net sales by segment

The automotive segment is the most important with 53% of overall sales. The company offers over 427,000 different parts through its UAP NAPA stores. They also market and distribute their replacement parts. GPC is also present in Asia under GPC Asia Pacific.

The industrial segment is operated under the Motion Industries brand. They distribute a variety of industrial parts such as bearings, mechanical and electrical power transmission, hose and hydraulic components. They are present in all kinds of industries from food and beverage to forest as well as healthcare industries.

The Office Products segment is headquartered in Atlanta and operates under the name of S. P. Richards Company. The company is engaged in the wholesale distribution of a broad line of office and other business related products through a diverse customer base of resellers.

The Electrical / Electronic Materials Group is the smallest GPC business division with only 4% of overall sales. It provides distribution services to OEM’s, motor repair shops, specialty wire and cable users, and a variety of industrial assembly markets.

Ratios

Price to Earnings: 21.86
Price to Free Cash Flow: 21.94
Price to Book: 4.31
Return on Equity: 20.88%

Revenue

gpc revenue

Revenue grew at a rate of 3.80% per year on average over this period. Since 2010, we have a steady uptrend as the economy strengthened. The automobile industry went through an important recession since 2008 but sales are now increasing. The automotive parts business is linked to the automobile industry and this is why GPC benefits from the current economic environment. The bulk of GPC’s revenue growth comes from its automotive part business while other segments have faced various challenges. The company has acquired smaller players in the industrial parts industry to boost their sales in the upcoming years.

Earnings and Dividends

gpc earnings and dividends

The previous graph explains how EPS growth is strong at GPC. While we have a continuously increasing dividend paid (red line), the dividend payout ratio slowly decreases (orange line). We also see how the dividend yield is slowly decreasing as well. This is a result of the stock price continuously increasing on strong quarterly announcements throughout the past five years.

Approximate historical dividend yield at beginning of each year:

gpc dividend yield

 

 

 

 

 

How Does GPC Spend Its Cash?

Genuine Parts shows a balanced model of acquisitions, shares repurchased and dividend growth. Their business model is based on buying small competitors each year. GPC benefits from exceptional integration abilities, turning their acquisitions into strong assets. In 2014, they bought Garland C. Norris, EIS, Electro-Wire and Impact products. GPC continually looks for companies to buy with revenues in the range of $25M to $125M. Small acquisitions ensure external growth each year without hurting the balance sheet too much.

The company also considers its investors. In 2013 it has repurchased 1.5 million shares and approved a 10.7 million share buyback program on December 31, 2013. In addition to stock buyback programs, the company also increases its dividend year after year.

Balance Sheet

Genuine Parts shows a strong balance sheet. GPC has a Debt to equity ratio of 1.385 and a current ratio of 1.536. Despites its history of acquisitions, goodwill counts for 10% of total assets.

Investment Thesis

Genuine Parts is a leader in auto parts and should benefit from the current positive economic environment in the US. The company is able to grow both from internal sources and through acquisitions. The low interest rate environment improves acquisition terms and facilitates GPC’s crusade to grow ever bigger.

While the auto part industry will continue to ride alongside US automotive growth, the industrial segment will benefit from a growing US GDP. Studies have shown that when the price of oil drops significantly, it has a positive correlation to US GDP growth. Since we expect a growth around 3.9% in 2015, the industrial segment will certainly strengthen.

You can buy GPC for its strong dividend growth as it continues to show potential. The automobile industry should continue to grow in 2015-2016.

Risks

While I like the numbers, I don’t like the fact that GPC fails to meet analysts’ estimates from time to time. They were too optimistic at the beginning of 2013 and raised their guidance to disappoint 9 months later with lower than expected results. Then again, the stock shows a low dividend yield around 2.25%, this might turn off some investors.

Also, longer manufacturer warranties prevent GPC from acquiring clients with relatively new cars. Since warranties are extended for several years, many car buyers tend to go directly to the dealership instead of buying parts from UAP NAPA.

Conclusion and Valuation

When you look at the metrics, you can see that sales, earnings and dividend payments are all going in the same direction. We also believe in the car industry for 2015. GPC is another strong dividend aristocrat that should continue to raise its dividend this year. The company shows a strong balance sheet and the ability to increase its dividend for years. GPC not only shows good results but it also grows by acquisition. Their ability to integrate new companies is reflected in their earnings which show a steep uptrend. GPC will continue to be a leader in its industry and we won’t lack for car parts in the near future. Now, we have to determine if GPC is trading at a good value.

Using the Discounted Cash Flow Analysis, we look at GPC as a simple money making machine. The point is to assess the value of the company by considering its cash flow generation capacity. Consider the EPS to continuously grow by 5% for the next five years and then by 4% and a discount rate of 9%, we have a stock value of $97.78 which is very close to the current value on the market.

The Gordon Growth Model can be used to estimate ranges of fair value for the stock. The dividend growth rate averaged 5% over the last seven years and we can expect the company will continue in that range. Due to the strong nature of the balance sheet, a conservative discount rate can be used to focus the fair value assessment on risk-adjusted returns.

Using an expected 5.5% dividend growth rate and a 9% discount rate, the fair value is only $69.33, which is under the current share price of around $98.50. Due to the low yield, the model is particularly sensitive, and reducing the discount rate to 8% boosts the fair value to $102. On the other hand, if the company was able to grow its dividend by 6.5% per year instead of 5.5% we would reach the current value ($97.98 with a discount rate of 9%).

Finally, we can use the Price Earnings Ratio method. As we can see, GPC is not only trading over the S&P 500 historical average (between 16 and 17) but also around its highest valuation over the past ten years:

 

gpc pe ratio

Considering the Gordon Growth model and the P/E ratio valuation, I tend to agree that GPC is currently overpriced. An investor could wait for a dip in the market before acquiring a position in GPC.

Full Disclosure: As of this writing, GPC is part of our DSR Portfolios.

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The Dividend Monk is Back!

After a complete year of silence, the Dividend Monk is Back, but a few things will change.

 

On March 23rd 2015, the Dividend Monk was transferred to Mike, the owner of The Dividend Guy Blog. I could have faked being Matt (the original author) and let you think that you are still reading his work, but I prefer to be transparent with you and keep his dividend stock analysis methods and writing style intact.

 

Who’s Mike, Who’s The Dividend Guy?

First and foremost, I’m a passionate investor. I have a CFP title, a BAA in finance and an MBA. I’m happily married with three wonderful children and currently work in the financial industry. I started investing in 2003 using leverage techniques and bought my first house in 2006 with cash down coming from my trading successes. I have been writing blogs since 2006 and own several websites. I love my day job, but I also want to keep a very good sideline in case anything happens. In June 2010, I bought The Dividend Guy as I wanted to share my passion for investing with readers. I have authored this blog since then and have even written a book and created an investing platform. My goal throughout the years remains the same: share my passion for investing with my readers and helping them in their investment journey.

 

Why Buy the Dividend Monk?

You might think that with a dividend blog already, I could be busy enough and there would be little to no purpose of writing for a second one and you could be right. To be honest, I wouldn’t buy most dividend websites I read on a weekly basis simply because they are quite similar to mine. In business, we would call this cannibalism since I would only split the same readership amongst the two blogs.

The reason I bought Dividend Monk (DM) is because it is quite different from The Dividend Guy Blog (DGB). I’ve always appreciated the more analytical side of DM which I never developed on my own blog. This is why I will keep the structure and calculations he uses to analyze a company. While I make jokes from time to time on DGB, DM will remain serious and go deeper with its analysis.

This will also answer a good question I keep having from my own readers: when buying a stock? When is the value right? Using the dividend discount model is a great way to determine the value of a company and, therefore, the right moment to buy it. This is why I will keep using the DM Toolkit to analyze companies from a different angle than I use on my own blog. It’s just easier for me to separate the two types of analysis on two different websites. I hope you will like the work produced here.

 

Matt is Still on Board for the Newsletter

In our agreement, Matt will continue writing newsletter issues. Not all of them, but he will still be around. I’m happy to count him on my team as he will continue to add great value to the investing newsletter.

I’m excited to start this new adventure and hope you will have great success in your investing journey!

 

Cheers,

Mike

The Dividend Guy… and the Dividend Monk ;-)

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