AAPL - Apple Inc.

[petec]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

 

Except that it forces me to sell my stock at an undervalued price if I want income which is a huge disadvantage for the income-requiring investor.

 

Personally I'm a big fan of dividends because I think they are harder to abuse.  At the least, I think the tax code ought to treat both the same and buybacks ought to be accounted for in the way described under the "share buyback" link here (https://www.fundsmith.co.uk/analysis) i.e. in the same way as purchases of another corporation's stock would be.

 

When a stock pays a dividend, the price gets adjusted downwards, so the total dollar value of your investment is the same in either scenario.

 

Yes, but the intrinsic value isn't, if I have sold shares below IV.

[Liberty]

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

But if the money goes to buybacks, the company is also buying back shares below IV on your behalf, so that balances out.

[petec]

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

But if the money goes to buybacks, the company is also buying back shares below IV on your behalf, so that balances out.

 

Absolutely - in theory, but not necessarily in practice.  I cannot control when the company buys back shares, so there is a distinct risk that the company does NOT buy back shares to offset my dilution.  To me, since we know that companies (in aggregate at least) are not very good at accelerating buybacks during selloffs, that's a very real risk.  If I have to sell steadily, and if we know that companies in aggregate prefer buying back when their stock is high, then the average price of the buyback is likely to be higher than the average price at which I sell, over a very long period of time.

 

Clearly I can't quantify that!

[Mephistopheles]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

 

Except that it forces me to sell my stock at an undervalued price if I want income which is a huge disadvantage for the income-requiring investor.

 

Personally I'm a big fan of dividends because I think they are harder to abuse.  At the least, I think the tax code ought to treat both the same and buybacks ought to be accounted for in the way described under the "share buyback" link here (https://www.fundsmith.co.uk/analysis) i.e. in the same way as purchases of another corporation's stock would be.

 

When a stock pays a dividend, the price gets adjusted downwards, so the total dollar value of your investment is the same in either scenario.

 

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

Say there is Company A that pays a 5% dividend and Company B who repurchases 5% of their stock, both selling at 50% of IV.

 

You own 1,000 shares in each company at $100/share, with 10,000 shares total outstanding. So you have twin $100,000 positions in 2 companies each with a market cap of $1 million.

 

Company A: $5,000 dividend brings down the market value to $95,000, and now you own 10% of a $950,000 market cap.

 

Company B: Repurchases 500 shares at $100 each. Now you own 1,000/9,500 = 10.52% of a $950,000 market cap. You sell 50 shares at $100 to produce your dividend, bringing your stake down to 950 shares aka 10% of a $950,000 market cap.

 

The numerator is down in the 2nd scenario but so is the denominator; therefore your discount to IV, as well as the dollar amount of stock you own, stays the same.

 

 

[Liberty]

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

But if the money goes to buybacks, the company is also buying back shares below IV on your behalf, so that balances out.

 

Absolutely - in theory, but not necessarily in practice.  I cannot control when the company buys back shares, so there is a distinct risk that the company does NOT buy back shares to offset my dilution.  To me, since we know that companies (in aggregate at least) are not very good at accelerating buybacks during selloffs, that's a very real risk.  If I have to sell steadily, and if we know that companies in aggregate prefer buying back when their stock is high, then the average price of the buyback is likely to be higher than the average price at which I sell, over a very long period of time.

 

Clearly I can't quantify that!

 

Absolutely. But if you are confident that the company is decent at buying back when prices are low, that can work in your favor. Or if you only own companies that are below IV, then the buybacks shouldn't be too value-destructive. As with everything in investing, it's a judgement call.

[Mephistopheles]

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

But if the money goes to buybacks, the company is also buying back shares below IV on your behalf, so that balances out.

 

Absolutely - in theory, but not necessarily in practice.  I cannot control when the company buys back shares, so there is a distinct risk that the company does NOT buy back shares to offset my dilution.  To me, since we know that companies (in aggregate at least) are not very good at accelerating buybacks during selloffs, that's a very real risk.  If I have to sell steadily, and if we know that companies in aggregate prefer buying back when their stock is high, then the average price of the buyback is likely to be higher than the average price at which I sell, over a very long period of time.

 

Clearly I can't quantify that!

 

This is a totally different point. If you own a stock where the management is buying back shares above IV, maybe you should sell the stock.

 

In the contrary, companies that pay dividends when their stock is below IV are also doing a disservice to their shareholders because of taxes.

 

The point though is, you creating your own dividend by selling shares doesn't make a difference vs. a company that pays you a dividend.

[rkbabang]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

 

Except that it forces me to sell my stock at an undervalued price if I want income which is a huge disadvantage for the income-requiring investor.

 

Personally I'm a big fan of dividends because I think they are harder to abuse.  At the least, I think the tax code ought to treat both the same and buybacks ought to be accounted for in the way described under the "share buyback" link here (https://www.fundsmith.co.uk/analysis) i.e. in the same way as purchases of another corporation's stock would be.

 

When a stock pays a dividend, the price gets adjusted downwards, so the total dollar value of your investment is the same in either scenario.

 

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

Say there is Company A that pays a 5% dividend and Company B who repurchases 5% of their stock, both selling at 50% of IV.

 

You own 1,000 shares in each company at $100/share, with 10,000 shares total outstanding. So you have twin $100,000 positions in 2 companies each with a market cap of $1 million.

 

Company A: $5,000 dividend brings down the market value to $95,000, and now you own 10% of a $950,000 market cap.

 

Company B: Repurchases 500 shares at $100 each. Now you own 1,000/9,500 = 10.52% of a $950,000 market cap. You sell 50 shares at $100 to produce your dividend, bringing your stake down to 950 shares aka 10% of a $950,000 market cap.

 

The numerator is down in the 2nd scenario but so is the denominator; therefore your discount to IV, as well as the dollar amount of stock you own, stays the same.

 

Markets don't always behave that rationally though.  You have stocks that go down after a buyback because income investors were expecting a larger dividend.  And you have stocks that go up after announcing a large dividend, because people want to buy to get in on it.  Both are irrational, but happen.

 

[petec]

Yes, but the intrinsic value isn't, if I have sold shares below IV.

 

But if the money goes to buybacks, the company is also buying back shares below IV on your behalf, so that balances out.

 

Absolutely - in theory, but not necessarily in practice.  I cannot control when the company buys back shares, so there is a distinct risk that the company does NOT buy back shares to offset my dilution.  To me, since we know that companies (in aggregate at least) are not very good at accelerating buybacks during selloffs, that's a very real risk.  If I have to sell steadily, and if we know that companies in aggregate prefer buying back when their stock is high, then the average price of the buyback is likely to be higher than the average price at which I sell, over a very long period of time.

 

Clearly I can't quantify that!

 

This is a totally different point. If you own a stock where the management is buying back shares above IV, maybe you should sell the stock.

 

In the contrary, companies that pay dividends when their stock is below IV are also doing a disservice to their shareholders because of taxes.

 

The point though is, you creating your own dividend by selling shares doesn't make a difference vs. a company that pays you a dividend.

 

I wasn't talking about companies buying back above IV.  I was talking about the fact that the buyback doesn't necessarily offset my dilution because the price at which they buy back doesn't necessarily equal the one at which I sold.  If companies could be trusted to accelerate their buyback at lows this would work in my favour; they cannot, so it does not.

 

Perhaps I can put it another way: solvent dividend paying companies tend not to suspend their dividends at market bottoms, whereas companies that buy back stocks often do.  I'd rather get the dividend, because then I can choose when to do the buyback.  And yes, there is a tax cost to that.

 

I understand and accept the point re: tax, although as I said earlier I wish the tax code would change to eliminate that as I don't think it has positive consequences.  But that's a separate point.

[Viking]

If I had to pick one reason why I like Apple today at $104 (trading at 11.2 PE to prior 12 month earnings) it is the state of its competitors in the high end smartphone category (selling phones for more than $500), especially Samsung. Today, iPhone drives the vast majority of Apple's sales and profits. If Samsung continues to get weaker as a competitor who is left to take Apple down in the next 5 years? My read is Apple is widening its moat in the premium smartphone segment each year and I expect 2016 to be no different. If this is the case then why are Apple's shares trading so cheaply (essentially trumpeting loudly that Apple is at peak iPhone sales)? If iPhone sales fall in 2016 it will not be because of the competition.

 

Samsung is clearly struggling. It's sales of premium smartphones have been falling for over a year due to the success of Apple's 6 and 6 plus and now 6s and 6s plus. As Samsung's premium smartphone sales fall its profits will continue to fall. This will impact its ability to invest in its business. I think a key story to follow in 2016 will be Samsung and if they are able to stop the decline in premium smartphone sales and stabilize their profitability. The bottom line is a much weaker Samsung is good news for Apple shareholders.

 

The following article sums the current situation up nicely: "With Samsung in an increasingly desperate condition, Apple faces the weakest significant competition it ever has in the smartphone and tablet markets." The article also mentions Samsung may be losing its chip business with Apple; should this happen Samsung will see another leg down in its sales and profitability.

 

http://appleinsider.com/articles/16/01/04/samsung-warns-it-will-have-a-tough-year-in-2016

[Palantir]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

It is not tax inefficient for me since I own the shares in a tax deferred account. Given that, I strongly prefer dividends over buybacks. Dividends are a built in catalyst and directly increase shareholder returns. Buybacks do no such thing.

[Mephistopheles]

 

I wasn't talking about companies buying back above IV.  I was talking about the fact that the buyback doesn't necessarily offset my dilution because the price at which they buy back doesn't necessarily equal the one at which I sold.  If companies could be trusted to accelerate their buyback at lows this would work in my favour; they cannot, so it does not.

 

Perhaps I can put it another way: solvent dividend paying companies tend not to suspend their dividends at market bottoms, whereas companies that buy back stocks often do.  I'd rather get the dividend, because then I can choose when to do the buyback.  And yes, there is a tax cost to that.

 

I understand and accept the point re: tax, although as I said earlier I wish the tax code would change to eliminate that as I don't think it has positive consequences.  But that's a separate point.

 

Sorry, I misread. Yes you did say that.

 

Of course if we assume a company reduces the buyback at low prices and increases it at high prices, maybe I'd take the dividend then too. But I was talking about a management who is shrewd enough to take advantage of downturns. I understand that many are not, but I wasn't referring to them.

 

If you need that regular income, then obviously whether you sell 5% a year or get paid 5%, doesn't make much of a difference and yea I would take the reliability of the 5% dividend as well. Still this destroys value for the other shareholders and I think we can agree on that.

[Mephistopheles]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

It is not tax inefficient for me since I own the shares in a tax deferred account. Given that, I strongly prefer dividends over buybacks. Dividends are a built in catalyst and directly increase shareholder returns. Buybacks do no such thing.

 

I'd rather have long term value than a short term catalyst. Buybacks (if below IV) certainly do create value over time and that's what truly matters.

[Guest Grey512]

One significant risk people seem to miss with AAPL is potential China currency devaluation. Knock-on impact benefiting competition, reducing local affordability of luxury items like iPhones, etc.

[Picasso]

The numbers you see from Apple are just mind blowing.  They can spend $50 billion on share repurchases and it wouldn't even dent the shares outstanding by 10%.  Cash flow is just insane as well.  It screams peak earnings along with an optically cheap 10-11x multiple.  Look at all the other peak earnings stories with massive market caps throughout time and it's easy to see why this stock stays cheap.  It's also super loved and well followed.  There are certain shareholders who understand it well, but you need a lot of people to understand it well to get a "fair" price.

 

It's also one of those stocks where if you don't own it and it performs well, it puts a ton of pressure on asset managers to buy it.  When it doesn't perform well, there's some incentive for them not to own it because it could mean the difference between outperforming peers or not.  The latter, along with the China issues, seems to be what is driving this lower imo. 

 

Anyway there's over 500 pages on this thread... Not a lot to add at this point.

[Palantir]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

It is not tax inefficient for me since I own the shares in a tax deferred account. Given that, I strongly prefer dividends over buybacks. Dividends are a built in catalyst and directly increase shareholder returns. Buybacks do no such thing.

 

I'd rather have long term value than a short term catalyst. Buybacks (if below IV) certainly do create value over time and that's what truly matters.

 

Not true, the only real thing that matters  (to me at least) is an increase in share price (or cash flows from asset) what happens to the intrinsic value is academic IMO.

[Liberty]

Neil Cybart has some interesting questions and things to look for in 2016:

 

http://www.aboveavalon.com/notes/2016/1/4/apple-questions-for-2016

[Mephistopheles]

 

Not true, the only real thing that matters  (to me at least) is an increase in share price (or cash flows from asset) what happens to the intrinsic value is academic IMO.

 

And what if you don't get that increase in share price?

 

Intrinsic value is much more than "academic", as stock price follows suit over time. Sure I'd love a huge pop from a short term catalyst, but a 50% or 80% jump in the stock (assuming that's how large my undervaluation is) due to a dividend boost is all but guaranteed. I'd rather not waste money on dividend taxes hoping that Mr. Market gives me my price over night!

 

Besides, if I'm willing to put money in an undervalued stock, I'm more than happy to wait for a price rise as the company accumulates its own shares. You should check out Buffett's letter on dividends vs. buybacks from the last few years.

[Viking]

Picasso, I think many people are concerned with Apple's size. A partial answer to this concern is to look at shares outstanding. In April 2013 there were 6.6 billion. As of Oct 2015 there are 5.6 billion. My guess is in three years (October 2015) there will be 4.6 billion or 30% lower than their peak. Total earnings will continue to grow and this means earnings per share will be much higher.

 

I am not looking for Apple to deliver 20-30% returns from here; 10% per year would be great.

[gary17]

Viking

are you thinking 10% per year is good

or you'd actually buy with margin -- I believe IB allows 4x on AAPL ... which could theoretically speaking give you 40% return and the interest rate is around 1% ?

 

I have no position; but that's how i am thinking about AAPL these days -

 

 

Gary

[Viking]

Gary, I know the 10% number looks pretty underwhelming...  Given its size I do not invest in Apple and expect to hit a home run (double or more). I will be happy with a solid single, and this for me is 10-12%. Absent a global sell off I expect Apple to easily deliver a 10-12% return this year. And with a little good news Apple could easily be up 15-20% from current levels.

 

I have never used leverage. Should Apple fall to $95 or below I am thinking I may dabble in options and buy some leaps.

[Picasso]

The size issue isn't so much a killer for me; it's where they get those incredible earnings.  Like it or not you're really dependent on length of upgrade cycles, higher and higher sales number per product cycle, etc.  The first iPhone flop is going to send the stock down into another 20% correction.  This compares to something like Google which is much more annuity like and they have incredible growth in EPS without massive shares repurchases or hoping for a tax holiday to get access to the cash trapped overseas.  They invest in stuff like YouTube or SpaceX or Nest versus say Beats.  Despite looking silly when doing it, it works out really well for Google shareholders.

 

It's easier to say Google will be synonymous with search in ten years than saying Apple will be synonymous with mobile devices.  But I agree that at these prices you're looking at 10% EPS growth for at least a few years.  What the market will pay for that EPS is another thing altogether...

 

Maybe the thing that bugs me about Apple is the way investors get emotionally attached to it.  They love it so much that they think other investors are dumb for not loving it too.  At least not loving it enough to pay them 20x for their shares.  Just let Apple stay cheap and have the share repurchases and future products work out your returns.  No need to constantly complain about how cheap the shares always are.

 

Bah!  Like I said, nothing new to add here...

[Viking]

Liberty, thanks for posting the link to the Above Avalon article.

 

Here are a couple of things I will be watching for in 2016:

1.) new 4" iPhone in April: does this happen? If so, will we see 3 new phones from Apple each year? I hope so.

2.) iOS for high end iPads: development of iOS for iPad has been constrained by screen size for iPhone. Will Apple accelerate the functionality of iOS for iPad to give the device more functionality? The power of the chip in iPad is now desktop class; all they need to do is grow iOS for iPad. If they can do this I think they will be able to significantly grow high end iPad sales at the expense of laptops and pc's (and Mac's)

3.) App Store functionality: do we get a makeover in 2016?

 

 

[innerscorecard]

One significant risk people seem to miss with AAPL is potential China currency devaluation. Knock-on impact benefiting competition, reducing local affordability of luxury items like iPhones, etc.

 

This has been my biggest worry. Thankfully, this risk is easily hedged out at the portfolio level.

[innerscorecard]

The numbers you see from Apple are just mind blowing.  They can spend $50 billion on share repurchases and it wouldn't even dent the shares outstanding by 10%.  Cash flow is just insane as well.  It screams peak earnings along with an optically cheap 10-11x multiple.  Look at all the other peak earnings stories with massive market caps throughout time and it's easy to see why this stock stays cheap.  It's also super loved and well followed.  There are certain shareholders who understand it well, but you need a lot of people to understand it well to get a "fair" price.

 

It's also one of those stocks where if you don't own it and it performs well, it puts a ton of pressure on asset managers to buy it.  When it doesn't perform well, there's some incentive for them not to own it because it could mean the difference between outperforming peers or not.  The latter, along with the China issues, seems to be what is driving this lower imo. 

 

Anyway there's over 500 pages on this thread... Not a lot to add at this point.

 

Seems perfect for long-term shareholders, then, since the situation is so bad for short-term shareholders, and the company has good capital allocation.

 

If long-term AAPL shareholders do badly over time, it will because they have screwed up the fundamentals of the business. It almost seems to me that AAPL at these prices is a binary bet on whether or not the iPhone business will collapse or not.

[innerscorecard]

It's easier to say Google will be synonymous with search in ten years than saying Apple will be synonymous with mobile devices. :-X

 

I disagree with this on both ends. Google's search is not synonymous with the job to be done that search provides.

 

Maybe the thing that bugs me about Apple is the way investors get emotionally attached to it.  They love it so much that they think other investors are dumb for not loving it too.  At least not loving it enough to pay them 20x for their shares.  Just let Apple stay cheap and have the share repurchases and future products work out your returns.  No need to constantly complain about how cheap the shares always are.

 

Who's complaining? The bad thing that could happen with AAPL being cheap is that Apple management does something stupid because of that situation. But they've mostly shown that they have the discipline to ignore the noise. (Unless, perhaps, Apple Watch was released a bit too early to prove the world wrong. Unlikely, I think.)