This time three months ago on July 31 I wrote an article asking if Apple Inc is the world's best company?
The article summarised Apple's strong third quarter for its fiscal year ending June 30 2019. On the back of that quarter I suggested the shares were a buy at $213 with the stock climbing around 15% since then including dividends.
I've also suggested Apple shares are a good buy over the past 5 years with the stock up around 125% plus dividends over the period.
Fourth quarter
This morning Apple reported an eye-watering quarterly cash profit of US$13.7 billion on revenue of US$64.04 billion for the quarter ending September 30 2019.
This translated into $3.03 in earnings per share, versus $2.91 in the prior corresponding quarter (pcq). Apple also declared $0.77 cents per share in dividends. iPhone sales were down around 10% on the pcq at $33.4 billion.
The current Christmas quarter is the 'big one' for Apple as a hardware retailer with it forecasting revenue between US$ $85.5 billion and $89.5 billion on a gross margin between 37.5% and 38.5%. In other words Apple could potentially post a record profit this quarter on the back of iPhone 11 sales and the growing strength of its services business.
Capital returns
A lot of Australian investors might be put off Apple shares by the 1.3% trailing yield and lack of franking credits but dividends only equalled around $3.5 billion in investor returns over the quarter.
It also bought back $18.5 billion worth of stock which naturally lifts EPS and the value of investors' holdings over the long term.
In fact Warren Buffett has pointed out that only one organisation is a larger buyer of Apple shares than Berkshire Hathaway.
And that's Apple itself.
Buffett has also pointed out that the cheaper Apple can buy back its shares today the greater the compound returns to investors over the long term.
The aggressive buy-back also indicates Apple's management still thinks its own stock is cheap. I am not going to argue with that given the strength of the business.
It has an incredible $206 billion cash on hand to fund its buyback (around 18% of its own market cap) and that's before we consider that the dividend payout ratio only stands at around 25% today. In other words it could triple the dividend tomorrow and still have free cash flow left over.
Apple also appears to have a wide moat as it never discounts products and charges price premiums to boast big profit margins.
This suggests cut price competitors struggle to compete.
Warren Buffett has often eulogised about these kinds of businesses and is not the world's richest investor for nothing.
Should you buy?
By historical standards Apple is now trading on a high multiple of profits at around 18x analysts' consensus forecasts for FY 2020 EPS around $13.90.
For such a quality business financially and product wise this looks reasonable value to me.
Moreover, when you compare it to some of the racy valuations sported by local tech or hardware stocks like WiseTech Global Ltd (ASX: WTC), Technology One Limited (ASX: TNE) or Cochlear Ltd (ASX: SEK) the value becomes even sharper.
I continue to rate Apple shares a buy!
