Breaking Down Apple's Dividend And Buyback Announcement

Apple (APPL) has a problem. There, I said it. So what is Apple's problem? It is having too much money, specifically $96B worth. Recently, Apple CEO Tim Cook formulated the following two-pronged approach to address this 'unfortunate' issue.:

• Issuing a quarterly dividend of $2.65 per share beginning July 1, 2012
• Implementing a $10B share buyback program, spanning 3 years and commencing September 30, 2012

So let's analyze the consequences of these rather astute strategies.  

ADVANTAGES OF DIVIDEND ISSUANCE
Companies typically issue dividends when they experience periods of stunted growth. Dividends serve as a means of attracting defensive-minded investors who pursue stable sources of income such as dividends, as opposed to high-growth, riskier equities with greater potential for ROI. However, strong growth and dividend issuance aren't necessarily mutually exclusive, as is the case with Apple. Apple's dividend issuance creates a number of opportunities including:

• Increased demand and a higher stock price, through widened access to the stock. Mandates restrict certain dividend-funds from purchasing stock that do not provide dividends, for risk aversion purposes. Apple's scheduled issuance opens the doors to most dividend-orientated funds. This drives demand and naturally, the stock price as fund managers seek to capitalize on lucrative stock that also provide a consistent source of income
• Increased demand will also be supported by regular investors who are interested in defensive investing
• Increased shareholder wealth through the return of Apple's earnings
• Apple's 1.81% annual dividend yield is roughly on par with the S&P 500's annual dividend yield of 2.07%. Such dividend yields are a rarity for companies with high-growth prospects
  

DISADVANTAGES OF DIVIDEND ISSUANCE
  Are dividends the most cost efficient way of addressing Apple's excessive cash reserves? Disadvantages of Apple's dividend issuance are:

• Taxation diminishes the true value of earnings. $1 of earnings channeled for issuance does not translate into $1 of shareholder dividend income, due to the 15% dividend tax rate. Furthermore, money brought from overseas is subject to a repatriation tax. Tim Cook mentioned that earnings applied to dividends will be based on domestic reserves. However, this is concerning since $64B of the cash hoard is overseas. Also, overseas reserves have grown by 82% over the last year
• Is issuance the most efficient means of spending money? Is it more efficient to spend on research and development, marketing, or the establishment of reserves to account for any unforeseen liabilities? $1 of earnings translates into $1 of spending through these avenues

STOCK REPURCHASING
Stock repurchasing is the act of a company purchasing it's floated shares. The reduction in float results in increased EPS, assuming flat earnings quarter over quarter. Increased EPS directly results in a more favorable stock valuation. Apple's recent repurchase buyback should drive the stock price in the future. Apple's current market capitalization is $561B. The $10B buyback figure totals less than 2% of the current market capitalization so the impact of the stock buyback would be minimal. Furthermore, it is expected that the market capitalization will expand over the next few years, which would lessen the impact of the stock buyback to an ever greater extent.

CONCLUSION
I believe Apple's recent dividend and buyback announcement was a smart ploy because it significantly increases demand by attracting dividend-orientated funds and defensive investors. Quantitatively, the $2.65 quarterly dividend and $10B total stock buyback represents a small fraction of the $96B cash hoard. This was also an astute decision as the company minimizes or possibly avoids the impact of repatriation taxes and keeps significant cash reserves for product innovation, marketing and any unforeseen liabilities.

Why I see 20% upside in Apple Stock, within a year

20% upside may appear to be a significant return, given the volatile state of the stock market. So lets delve into the fundamentals and technicals of Apple (Ticker: AAPL). APPL is currently trading at $497. I believe this stock will hit $600 within a year. Here's why:

A day in the life of Apple stock. Look at that volatility!

                                

                              THE TECHNICALS

Technicals are essentially indicators that are used to quantitatively assess the value of a stock.

The Price to Earnings Ratio (PE Ratio)

APPLE IS CHEAP
The PE Ratio is the closing price of the stock divided by the earnings per share, in one year. It's a basis used to gauge the relative valuation of a company. A PE Ratio of 20 or less is considered favourable. APPL currently has a PE ratio of 14.16 which is good. So even though APPL stock may appear to have reached nosebleed levels, considering it's recent rally - the stock is relatively cheap when looking at the company's earnings.


APPLE STOCK IS THE CHEAPEST IT'S BEEN IN YEARS
Remember, the value of the stock isn't merely determined by the stock price, it's determined by the stock price relative to the earnings. So a good way to analyze whether the stock price is cheap, compared to history is to compare the PE ratios over time.

• The current PE Ratio is 14.16
• The PE Ratio 5-year ave is 22.2
• 1-year Trailing PE is 17.6
• 1-year Forward PE is 11.6

So comparing the current PE to the 5-year average, Apple stock is essentially 36.5% cheaper. The Forward PE Ratio indicates that relative valuation of Apple will improve even more, within the next year.

APPLE IS CHEAPER THAN OTHER BIG NAME COMPANIES

• Google PE is 20.35
• Amazon PE is 134.65
• Zynga PE is 159

 PEG Ratio

APPLE IS PREDICTED TO HAVE STRONG GROWTH

The PEG Ratio is an indicator that assesses future growth of a company. It is the PE Ratio divided by Long Term Growth. Anything below 0.8 is favourable.

• Apple PEG is 0.7
• That's at a 70% discount when compared to the S&P500.
•  That's at a 62.5% discount when compared to the computer hardware industry

Moving Averages


APPLE IS TRENDING UP!

The moving average is the average of the closing stock prices over a specified time. The current stock price is compared to moving averages to assess the trend of a stock. Generally, if the stock price is greater than the 50-day moving average which in turn, is greater than the 200-day moving average, the stock is trending up.

• The 200-day moving average is $401.67
• The 50-day moving average is $442.97
• The current stock price is $497

.....Do the math

There are a lot more technical indicators used to analyze the value of a stock. I highlighted some of the main tools to show that even though Apple may appear to be expensive given the radical surge in prices over the last few weeks, it's actually a relatively cheap buy. So lets look at some of the fundamentals that support the indicators.

                 THE FUNDAMENTALS

Fundamental trading involves qualitatively assessing the value of a company by tracking company actions, strategies etc.

• A myriad of companies have switched their operating system from Blackberry servers to IOS. This marks a shift in the corporate world from Blackberry, the firm that had traditionally placed a strong grip on the corporate mobile market. Halliburton recently announced the switch to IOS. This move also validates the credibility of the security of the IOS system, since a defense company such as Halliburton would naturally require prime security measures.
• Given the large stock pile of cash, it is widely believed that Apple will provide dividends. 
• Although Apple may have saturated it's markets in the US, demand in China is extremely strong. Sales have been increasing significantly in China and should continue to do due to the burgeoning middle class and rapid urbanization

Take a bite out of Apple Stock

                              THE RISKS

• Apple's Chinese suppliers have been associated with human-rights abuse. Apple hasn't been proactive in addressing these issues. Such bad publicity may tarnish the company's reputation and stock price
• Consumer electronics is an ever evolving world of fads and preferences. Apple needs to continually provide appealing products to maintain it's relevance and that creates uncertainty
• Competitors such as Google's Android have been eating into Apple's market share. 
• Exchange rate risk associated with foreign sales. This can be mitigated through hedging with foreign/US currencies, although the risk is still present. 

                            CONCLUSION

So the fundamentals and technicals indicate that Apple is stronger than ever. Considering these indicators, I believe a 20% return is realistic and a conservative estimate since Apple has enjoyed much stronger growth with much weaker indicators.

• Apple stock price has grown by 41.8% over the last year
• Apple stock price has grown by 145% over the last 2 years
• Some Wall Street investment banks expect a 40.8% return over the next year

It's all about the Bull Market

It's amazing how quickly the tide changes. A few months ago, it was almost impossible to find an economist who was bullish on the American economy. Pundits were blabbering about 'double-dip' this and 'flat GDP growth' that. Fast-forward to today and economists are painting a starkly different picture. The consensus for GDP growth is predicted at a modest 3% figure, and analysts are expecting a stock market rally until year end. My point is: NEVER DOUBT THE AMERICAN ECONOMY. To prove my point, lets look at my portfolio valued at my first post (8/20/11) and look at the annualized return to date. I listed my portfolio in my prior post.

(N.B: I'm listing the price per share as of 8/20/11, 10/28/11, the return over that period, and the annualized return)
(I) Caterpillar (CAT) - $79.97, $96.85, 21.1% = annualized return of 171.3%. - that's almost double your original investment in profits!
(II) Bank of America (BAC) - $6.97, $7.35, 5.5% = annualized return of of 32.2%
(III) Apple (APPL) - $356.03, $404.95, 13.7% = annualized return of 95.3%
(IV) Baidu (BIDU) - $126.98, $144.2, 13.9% = annualized return of 97.1%
(V) Philip Morris (PM) -$68.83, $72.12, 4.8% = annualized return of 27.7%
(VI) SOHU (SOHU) - $69.01 - $69.00 = 0% annualized return
(VII) Citigroup (C) - $26.77, $34.16, 27.6% = annualized return of 256.4%

So weighting each stock based on total investment, the total weighted annualized return is 78.63%. Lets also be conservative and assume a 1% dividend yield across the portfolio, bringing the return up to 79.63%. Think about that. If you invested $100,000 as of 8/20, you would have made $79,630 profit in a year, bringing the total value of your portfolio to $179,630. Not bad eh? Especially in today's economy.

So what lessons can be learned from all of this? Here's my thoughts:

(i) ALWAYS BE CRITICAL OF THE PUNDITS:
Pundits may be so-called experts but remember, they're also heavily invested in the stock market. This being said, they're only going to publicize opinions that would benefit their portfolio. A bearish investment banker who's placed a lot of short positions always advocates that the economy is in dire straights because that leads to investors overreacting and unloading their investments. This drives down the stock prices which makes short positions very lucrative for the investment bank.

(ii) USE HISTORY AS A GUIDE
I've only been investing for a few years and there's already been countless times when the market may have pulled back due to sovereign debt crises, lack of clarity from the federal reserve etc. It seems that during these sour situations, the average investor assumes the market will never recover and starts selling their investments at significant discounts. My point is, look at all the low points in history, whether it be the crash of '87, the great recession of 2009 or even the depression. Statistically, the market performed significantly better 3 months, 6 months and even a year after these times. Just have a little patience. Don't overreact and sell. Unless there is something fundamentally wrong with your companies, then don't sell. Wait and prices will go up!

(iii) DO YOUR RESEARCH
Don't invest on your gut feeling. Do the research. Look at the technicals and fundamentals of a company. Critically read the analyst reports and digest as much information as possible.....knowledge is the key here. If you want to make money, then you need to put in the work and do your homework. Also, vary your analysis for each company. For example, the P/E ratio of a relatively young company isn't a good indication of future profitability as expenses are generally high during the initial stages, thereby distorting the P/E ratio. However, this ratio is a much more useful tool of gauging the profitability and historically relative cheapness of a more established company such as Caterpillar.

Interested in my current portfolio? Here's the breakdown:
(i) Caterpillar (34%) - Heavy-Industrials/ Construction. Should be the first industry to grow rapidly during global recovery
(ii) Bank of America (18%) - Financials, trading well under book value
(iii) Baidu (20.2%) - Chinese search engine/advertising- the Google of China
(iv) Sohu (12.7%) - Chinese internet portal/ online gaming
(v) John Deere (4%) - Agricultural/ Construction equipment. Good play for global expansion and rising food costs
(vi) Netflix (6.4%) - Company had made a lot of recent mistakes but I bought this at a huge discount and there are a lot of overseas opportunities
(vii) Dang Dang (3.7%) - Chinese E-Commerce, up and coming Amazon of China
(viii) Citigroup (0.1%) - financials - trading well under book value
(ix) China New Borun Corp (0.1%) - good volatility play

"It's the economy, idiot"

Politicians aren't economists. This adage has never been more relevant- and it's nauseating to stomach that the American "Jobs" Act, is a means of returning the US to economic relevance. Corporate America is the engine of the economy, and simply taxing productive corporations and diverting resources to non-productive entities doesn't seem like an intuitive way to promote growth. My favourite economist, Larry Kudlow said it best: "We believe that free market capitalism is the best path to prosperity."

I believe there are two vital phases of an economic recovery. The first, being government stimuli. A double-dose of fiscal (policy implemented by the federal gov) and monetary policy (policy implemented by the Federal Reserve and it's chairman Ben Bernake) is important to provide the foundations of economic stability. In order to sustain economic growth, the second phase is instrumental: Corporate expansion. Corporate expansion results in increased jobs, trade, manufacturing, investments, wealth and confidence. These are the vital ingredients for a recovery and Washington needs to take heed.

Here's my strategies for economic growth. Some may appear radical. But they may be worth a shot.

(i) ABOLISH INCOME AND PROPERTY TAX AND INSTITUTE A VALUE ADDED TAX
Deficit. Deficit. Deficit. Those words are rolling from everyone's lips yet no one seems to be talking about a fundamental flaw that's causing the deficit. The government is too reliant on cyclical income sources that evaporate as the economy sours. During recessionary times, unemployment tends to increase and property values fall. This implies that the government receives less income in the form of payroll taxes and property taxes- which account for a significant chunk of it's revenue. This is an issue that will continually recur as the economy dips in the future. The key here is to reduce exposure to such a volatile income and rely on a more consistent source, such as a Value Added Tax (VAT). A VAT is a flat tax charged on goods and services. Essentially, consumption would be taxed as opposed to income. Although consumption is subject to whims of the economy, it is relatively stable as people always need to consume. Benefits of a VAT system include being rewarded for saving and investing as opposed to spending, increased employment as businesses aren't subject to payroll taxes, a more stable source of income for the government, and an improved housing market as it's cheaper to be a home owner. And for those who believe that the rich should pay more taxes, the rich generally consume more and hence would theoretically pay more VAT.

(ii) A NEW, NEW DEAL
I value a limited welfare system. Every government has a duty to ensure the well-being of their country's constituents. This being said, welfare checks create complacency. Why not implement a new FDR-style-New Deal? Welfare and social security benefits should be paid out, but these should be distributed with stipulations. Such stipulations include compulsory skills training courses, assisting with infrastructure projects that benefit the county (i.e freeway construction, park maintenance etc) or even volunteering at a hospital or food bank. This benefits the recipient in regards to honing their skills and it also improves the community. This seems significantly more productive than blindly handing out checks.

(iii) QE3
Quantitative Easing is a form of monetary policy that has recently been implemented by the Federal Reserve. The Fed purchases financial assets such as treasuries or mortgage-backed securities (MBS). In short, the sales result in deposits of money at banks which results in an increase of credit available for borrowers. In the case of purchasing treasuries, the demand for the asset increases, that results in an increase in price and a corresponding reduction in yield. Interest rates typically track treasury yields so quantitative easing results in reduced interest rates, or in other words- the cost of borrowing is cheaper. I believe a third round of Quantitative Easing (QE3) is necessary to maintain low interest rates. This allows small businesses to borrow money and grow, current homeowners to refinance and save money, prospective homeowners to borrow money at attractive rates and large firms to borrow capital at historically low rates for further expansion.

(iv) MARKET CLARITY
Regardless of the policies implemented by Washington, there needs to be clarity. Corporations are sitting on mountains of cash but the uncertain political environment has made it irrational for businesses to jump the gun and engage in any significant business expansion. Washington's bickering needs to stop and sound, coherent policies need to be implemented soon. Of course, that may be asking for too much.....

This is the Bull-yah Report. Where capitalism is king and socialism is the devil..


Interested in what stock I own? Here's my portfolio breakdown:
(i) Caterpillar (CAT -- 35% portfolio)
(ii) Bank of America (BAC -- 18%)
(iii) Apple (AAPL -- 15%)
(iv) Baidu (BIDU -- 14%)
(v) Phillip Morris (PM -- 5%)
(vi) Sohu (SOHU -- 12%)
(vii) Citigroup (C -- 1%)

Welcome to the Bull-yahhhhhh report

Welcome to the Bull-yahhhhhh report. Where the bull market is king.

Sitting on the side-lines of the stock market? Fearing recession 2.0 aka a double-dip? Worried that the sovereign-debt crisis in Europe might be forming the underpinnings of contagion? Or do you think that the upward trend in gold is based on speculation? Worry not. Here are my tips on how to play the current market. For a second, forget the VIX indicator (the stock ticker for the Chicago Options Exchange Market Volitility Index = general gauge of fear in the market), calm those emotions, and listen to the astute words of the 'wise investor' Axel Rose, "All you need is just a little patience."

Here's my three-pronged approach on how to tackle this economic uncertainty.

(i) Act defensively (50% of portfolio):
Buy large-cap (large cap= large capitalization = (no. of shares * price per share) = a lot), multinational US companies with sound balance sheets, a strong dividend yield and that's recession-proof. The prime example of this type of company is Phillip Morris (Stock ticker = PM). The multinational nature of PM ensures that it's not solely subject to the economic whims of one country so the risk is spread out. It also means that the firm is capitalizing on emerging markets with a growing customer base like China so the growth opportunities are there. The dividend yield (4.4% in PM's case) ensures a steady stream of income and it's a heck of a lot better than the return from any type of savings account, short-term bond or CD. So even if the stock price remains flat, you're still making money. And cigarettes are always in demand, regardless of whether we're in a recession or boom so the stock is recession proof. The stock price has been increasing significantly over the last year and this is largely reflective of Chinese exposure. Phillip Morris is a must have. You don't have to smoke to reap the benefits of a tobacco-based company.

(ii) Invest in China (30%)
China is largely largely insulated from the debt-crises in Europe and is subject to rapid-urbanization which has opened up a myriad of potential customer bases. Whilst the rest of the world is going to shits, China has been experiencing rapid Gross Domestic Product growth, a growing middle-class and increased control of trade and debt around the world. Simply put, China will be the super-power of the world and it's a good time to take a piece of the pie. I recommend Chinese technology companies such as Baidu (BIDU) which is often referred to as the Google of China. China boasts the largest internet-user base in the world and it's only increasing. Baidu recently reached agreements with Microsoft for web-based applications through mobile devices and it's the number one most visited site in the region. It has a strong brand-name recognition and controls a large chunk of the market share. However, there are risks involved in trading in Chinese companies including tight government control and the increased potential for accounting fraud. Also, the P/E (Price-to-Earnings Ratio = stock price/ earnings per share) of Baidu is very high. This implies that Baidu's stock price is relatively expensive but I believe this is largely reflective of growth opportunities.

(iii) Buy American financials trading under intrinsic value (20% of portfolio)
I'll probably get a lot of heat for recommending financials but I recommend buying discounted firms such as Citigroup (C) and Bank of America (BAC). These stocks are trading significantly under book value and although they have the potential to endure even more losses due to the European-debt crises, sour-mortgages and low interest rates, they will be fine once this economic uncertainty has somewhat cleared. Expect prices to rise by at least 5-fold within the next few years and by 100% within the next year. I'll explore the fundamentals and technicals of Citigroup in my next post and explain exactly why this stock is a steal.


Don't give in to the hysteria that's plagued Wall Street over these last few weeks. The stock market may be priced like we're headed towards a recession but economic data and corporate profits are indicating the counter and that's why today is the perfect time to scoop up stock for a nice discount. Don't let your emotions dictate your actions. Let your logic do the driving. Buy when people sell. And sell when people buy. This is the Bull-yahhhh report. Where capitalism is king. And socialism is the devil.