Apple (AAPL) is a notable omission in my international model portfolio. Here is one of the reasons.
Michael Santoli at CNBC reports that Apple’s sales and earnings over the past 4 years are essentially flat. The only metric that has improved is earnings per share (EPS) because of stock buybacks. Shares in issue have shrunk by 20.7%, from 5.8 to 4.6 billion.
Let’s break this down.
Earnings per share grew by an average 5.7% over the past 4 years, of which 0.2% was from actual growth and 5.5% from buybacks. Apple spent $170 billion on stock buybacks in the 4 years to September 2018 at an average of $150.85 per share.
In FY18 buybacks totaled $72.7 billion, or 7.5% of current market cap ($965.4 bn), well above its earnings of $59.5 bn. Apple is distributing capital to stockholders by way of buybacks.
FY19 estimated earnings yield is 5.4% and dividend yield is 1.4%, leaving retained earnings are 4.0%. Far less than the buyback yield. The company has heaps of cash and can basically keep doing this for a long, long time. But it erodes shareholder value.
Total return investors can expect, if they buy at the current price of $213.04, is 5.6% (5.4% earnings yield and 0.2% actual growth). That is all that Apple will earn on the money invested into buybacks. An admission that the company is standing still, powerless to inject new growth.
A PE ratio of 17.9 appears modest but it isn’t if you only have 0.2% growth. That amounts to a PEG ratio of a staggering 90 times growth!
Apple is no longer a growth company. Earnings are shrinking in real terms and the only way the company can maintain the illusion of growth is by buying back stock at exorbitant prices.