Don’t Overpay for Apple (AAPL) Despite the New Dividend.

Preferred stock: none

Bonds: none

DIVIDEND RECORD:  Apple has never paid a dividend in 17 years, but they recently announced that they would begin paying a quarterly dividend of $2.65 per share (http://www.bloomberg.com/news/2012-03-19/apple-to-pay-dividend-buy-back-stock-to-return-some-of-its-cash.html) beginning in the period starting July 1st, 2012.  Will they become a dividend grower?  Who knows; they have no track record.  However, the dividend will not be threatened by any debt, preferred stock, or bonds.

Dividend: $2.65 quarterly starting in 2Q 2012

Dividend yield: 1.7% ($10.60 annual dividend / $608.60 share price)

Dividend payout: 30% ($10.60 dividend / $35.11 recent EPS) -0R- 85% ($10.60 dividend / $12.39 average adjusted earning power)

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EARNING POWER: $12.39 per share @ 932.37 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

9/2007

$3.93

$3,496 M

889 M

$3.75

9/2008

$6.78

$6,119 M

902 M

$6.56

9/2009

$9.08

$8,235 M

907 M

$8.83

9/2010

$15.15

$14,013 M

925 M

$15.03

9/2011

$27.68

$25,922 M

937 M

$27.80

Five year average adjusted earnings per share is $12.39

Consider contrarian buying below $99.12 (8 times average adjusted EPS)

Consider value buying below $148.68 (12 times average adjusted EPS)

Consider speculative selling above $247.80 (20 times average adjusted EPS)

Apple (AAPL) is currently trading at 49 times average adjusted EPS.  This is stock’s price is highly speculative.

BALANCE SHEET – The chart of the balance sheet is beautiful, but the price to book value ratio shows you how overvalued Apple is at the present time.  Investors have forgotten that Apple traded at $82 – $85 a share between November 2008 and March 2009.  You can buy Apple near its book value if you are patient.  Their current ratio is not impressive despite all the pundit talk of Apple having so much cash.

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Book value per share: $81.80 as of September 2011

Price to book value ratio: 7.44 (under 1.0 is good)  You are paying a massive premium to book value for every Apple share at today’s prices.  Remember that is only as good as its last product.  Not every product is going to be a homerun.  When it eventually disappoints the share price is going to crash as the hedge funds retreat.

Current ratio: 1.58 latest quarter (over 2.0 is good)  I thought with all that talk of Apple being loaded with cash that they would have blow the current ratio away.   That simply isn’t the case.  They have $54.771 billion in current assets and $34.607 billion in current liabilities.

Quick ratio: 1.35 latest quarter (over 1.0 is good)  There is the cash showing through.

Debt to equity ratio: 0 (lower is better)  They are long term debt free.  Outstanding.

Percentage of total assets in plant, property, and equipment: 5.64% (the higher the better)  Not a lot of plant and equipment.  Here are where their assets are relative to total assets: Other long term investments 51.72%, current assets 39.49%, and intangibles 3.15%.

CONCLUSION – Apple will be a small dividend payer yielding about 1.7% at today’s stock price.  It will be interesting to see if they become a strong dividend grower over time.  The dividend will be safe at the onset.  Payout ratios are not a problem.  In my opinion the stock price is highly speculative at 49 times average adjusted earning power of $12.39 per share.  Apple’s share price has taken a beating in the past.  In late 2007 the share price peaked at $199.  By March 2009 the stock price had fallen to $85.  Don’t make the mistake to believe that Apple is crashproof.  There is a worldwide recession coming and Apple will take another beating.  I think the dividend it to entice hedge funds from pulling out of the stock with the recession hits.  Apple’s balance sheet is not as strong as I thought.  The price to book value is ridiculous right now and their current ratio is unimpressive.  However, they are in much better shape than most companies.  I recommend you sell it  if you own it now.  I think Apple is a safe buy below $148; otherwise, you’re playing a speculative game of the greater fool theory.  Don’t get trampled by the hedge funds when they exit their positions in Apple.  The dividend yield will be much higher below $148, you won’t be paying through the nose for earnings, and you’ll pay a much smaller premium to book value.

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DISCLOSURE – I don’t own Apple (AAPL).

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Published in: on March 21, 2012 at 1:47 pm  Leave a Comment  

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