The primary reason to own Altria is its dividend. The current dividend, $1.28 per year, results in a dividend yield of 8.34%. Given that Altria's EPS is only $1.54 per year, it is evident that the company pays out most of its profits to its shareholders. Despite the declining business, the company is well-positioned to maintain relatively stable revenue streams that will enable it to maintain this dividend. As a result, the company is suited more for long-term income investors than for short-term investors driven by capital gains. Altria's slow growth, difficult operating environment and other challenges make it a poor buy for investors seeking anything other than a relatively stable income stream.
Apple (Nasdaq: AAPL) is a designer, manufacturer and marketer of computers and related paraphernalia, both hardware and software. The firm markets desktop computers, laptop computers, portable music players (iPod), portable communications devices (iPhone) and the software packages to run these devices. Apple is vertically integrated in that they sell through channels that they control, such as the Apple website and at Apple stores. The company also markets related hardware such as servers and storage devices, as well as third party hardware that is compatible with Apple's products. In music, Apple makes and markets the iPod, a portable music player; and operates iTunes, which is both an operating system for Apple products and also an online music store. The firm also markets a wide range of third-party peripheral products, both hardware and software.
Apple competes with firms such as Microsoft in software and in servers; and with hardware manufacturers such as IBM, Hewlett-Packard, Compaq, Lenovo and a wide range of other hardware manufacturers. Competitors in music and portable communications range from Sony to Research in Motion to Motorola.
Each of these industries is driven by technological improvements and shifts in consumer tastes. Apple has tried to counter these risks to its revenue streams by fostering strong brand loyalty. The company is generally a smaller competitor, although it dominates portable music.
A purchased 1000 shares of Apple on October 28th for $99.91. As of December 5th those shares closed at $94. They have since rebounded somewhat to $98.27, with most of that rebound coming on Friday December 12th. Therefore, Apple shares lost $5.91 in the period between October 10th and December 5th, a percentage loss of 5.91%. Over that time, the S&P 500 lost 6.85%. Apple has a beta of 2.07, which indicates that the company's stock price is roughly twice as volatile as the overall market. Using that as an indicator, Apple shares should have dropped 14.17% to $85.75.
So Apple stock outperformed over the study period, despite the slumping economy.
Enthusiasm about this outperformance, however, should be tempered by a couple of facts. One is that Apple stock saw a massive decline in value prior to my purchase on October 28th. The company was trading at $179 in August, so over 40% of its value had already been lost before I bought in. The other factor is that the stock's volatility did not decrease. Indeed, since purchase Apple stock has ranged from $104.55 to $80.49. That is ended the period not far from where it started is not reflective of stability in the Apple share price.
The economic crisis has strongly affected Apple. The company markets to both consumers and corporations and both markets are reducing spending. The computer industry is especially vulnerable to this. Computer products are turned over more quickly in good times, but this turnover can lag in poor economic conditions because firms are able to stretch the useful life of most computer products further than they normally do. It is worth noting that Apple's stock price has fallen mainly on fears of future revenue reductions. Stock prices are considered to be a leading indicator, and investors clearly fear that Apple will be affected by the economic downturn.
As of yet, however, the impact of the economic slowdown has yet to hit Apple. The company grew Q4 sales 26.9% year-over-year. Additionally, Apple has maintained consistency in both its gross and net margins over the course of 2008. Many firms have been unable to maintain either sales levels or margins. This apparent insulation from the effects of the financial crisis, however, has not translated to stock market success. If we assumed that the 5.91% decline in share price between October 28th and December 5th was indicative of the market's view of Apple's future performance, this would make sense because the decline is consistent with a company that is weathering the storm. However, given the high volatility of Apple's share price over the study period, that conclusion cannot reasonably be drawn.
The computer industry as a whole has seen significant negative effects from the economic downturn. However, the tone in recent weeks has been to view the technology industry as being a pillar of stability during the economic storm. The rationale behind this view is that technology companies, while expected to suffer revenue declines, have the cash reserves to maintain profit levels and continue to invest in new products. The 3.24% increase in Apple's share price on December 12th directly reflects that sentiment (Schnurr, 2008). As of September 27th, Apple had $24.49 billion in cash and short-term investments (Apple Inc. 10-K, 2008).
The computer industry is particularly affected by decreases in corporate spending. The economic downturn reduces corporate spending in several ways. One is that corporations either cut staff or institute hiring freezes. Another is that corporations defer purchases of equipment such as computers, if the useful life of that equipment can be extended. Another is that corporations do not expand because they do not have access to capital, a result of the credit crunch. Consumers also hold back their spending. It has been noted that when the economy tightens, consumers increase their savings rates. This equates to a decrease in spending.
These spending decreases trickle down to Apple in a few ways. First, many of Apple's products are hit directly. The company is involved in many entertainment and lifestyle businesses, products considered discretionary spending by consumers. Sales of discretionary entertainment products are among the first see reductions in the event of economic downturn. Second, Apple is a supplier to business. When businesses reduce spending, Apple sees a reduction in revenue. Thus far, the company has successfully avoided this and maintained its strong growth trajectory, however,
In this way, Apple's revenues are more tied to employment and income figures than Altria's. Employment decreases, particularly in sectors that rely heavily on Apple computers, result in a decrease in sales. Moreover, reductions in employment lead to reductions in income. Income is strong tied to consumer spending, particularly discretionary spending, which represents a large component of Apple's business. Production levels have less impact on Apple, except in terms of their impacts on income and consumer confidence. Thus, we can see that Apple is strongly impacted by the employment-income cycle because of their dependence on both corporate and consumer spending.
It should be noted, however, that there are several other key drivers of business for Apple. The most significant of these is the technological environment. Apple has chosen a differentiation strategy, and therefore strongly relies on technological innovation to drive growth. Thus, Apple can make strong inroads in terms of market share even in a struggling operating environment if they are able to deliver technological innovation. Indeed, the high volatility of Apple's stock reflects more its cycle of new product development than it does the overall economic cycle.
Apple represents an interesting proposition for an investor. The company does not pay a dividend. Its most recent EPS was $5.36, certainly high enough to offer a dividend to its shareholders. The company has almost $25 billion in cash and short-term investments. There is no economic reason why Apple should not pay a dividend. However, they choose to plow back their profits into growing the business. In part, this has been necessitated by their volatility. The company needs a significant cash supply in order to weather the fluctuations in its fortunes.
As an investor, however, this excess cash reduces efficiency. The theory behind retaining all earnings is that the company needs that money to grow. Given Apple's size and obvious surplus of cash, this theory appears weak. The investor benefits only from growth in the company. In the past several years, Apple has achieved rapid growth, despite the unused stockpile of cash.
The economic downturn, according to the market, is going to stifle Apple's growth prospects.
Those prospects are still viewed to be greater than the growth prospects for the industry as a whole. Apple has a price-earnings ratio of 18.32 as of December 12, 2008, compared with an industry average P/E of 5.93. So the market is still pricing in fairly strong growth prospects for Apple in the future. Given that, an investor would be interested in Apple if he or she believed that Apple's growth was going to be…