You would think Apple (NASDAQ:AAPL), which is Warren Buffett’s largest holding at $50.6 billion, would be every investor’s favorite stock. Yet, AAPL stock often seems to take a back seat to Amazon (NASDAQ:AMZN) or one of the other FAANGs.
Short Hills Capital Managing Partner Steve Weiss recently suggested on CNBC that Apple CEO Tim Cook’s close relationship with President Trump is a big reason he owns AAPL stock. It’s the whole idea of keeping your friends close and your enemies closer.
“I like the fact that Cook continues to have the ear of the President. He’s one of the few people who can walk both sides,” Weiss said in his Aug. 20 appearance. “He transferred some production recently to China and yet he still has Trump’s ear, and Trump spoke positively about the arguments he made about the competitive disadvantage it would suffer to Samsung if they continue with the tariffs.”
While it’s impossible to know how the U.S.-China trade war will turn out given the unpredictability of both Trump and Beijing, the fact that Cook’s been able to keep an open dialogue with the administration, as Weiss suggests, is a real positive for Apple and owners of Apple stock.
As the FAANG stocks go, a case could be made for holding all of them in your portfolio. However, for me, Apple is currently at the top of my list for several reasons, in addition to Cook’s close relationship with Trump.
Here are but three.
Free Cash Flow
I love free cash flow generators. The more, the merrier.
Apple generated $58.3 billion in free cash flow over the past 12 months. That’s 22.5% of revenue over the same period. By comparison, Amazon had $22.1 billion in free cash flow over the past 12 months on $252.1 billion in revenue. That’s a free cash flow margin of 8.8% or one-third Apple’s.
Currently, Apple’s free cash flow yield is 6.0%, more than double Amazon’s FCF yield.
If you believe, as I do, that free cash flow provides greater operational flexibility, than there’s no question that Apple stock is a good FAANG stock.
Not to mention, free cash flow allows Apple to buy back more of its stock, which leads to higher EPS growth.
Share Repurchases
On April 30, Apple’s board increased its share repurchase program authorization by 75% to $175 billion. Of the $175 billion, $78.2 billion has already been repurchased, through June 29. That leaves $96.8 billion in buybacks in the future.
In the nine months ended June 29, the company had repurchased $49.2 billion of AAPL stock at an average price of $194.77, providing shareholders with a 5.6% return on investment based on a current share price of $205.67.
Over the past five years, Apple has reduced its share count by 28% through share repurchases. Using $1 million in net earnings and 100,000 shares outstanding as an example, a 28% cut in shares over five years would mean an increase of 38% in earnings per share without any increase in net earnings over the same period.
While I’m generally opposed to share repurchases because companies tend to overpay for their stock, when you generate as much free cash flow as Apple does, it’s much harder to make the same argument.
As long as Apple continues to generate 20% or more free cash flow margins, I can’t see them being a problem.
In periods of slow growth, they’ll act as an artificial floor for the Apple stock price.
Services Bring Balance
In the third quarter, Apple’s services revenue accounted for 21.4% of the company’s $53.8 billion in overall sales. However, services accounted for 36.3% of its $20.2 billion in gross profit.
So, while Apple’s iPhone sales declined by 12% during the quarter, its total net sales increased by 1%. That’s due to a healthy 13% increase in services and a robust 48% increase in its wearables, home and accessories sales, which includes AirPods, Apple TV, Apple Watch, etc.
If you believe that Apple’s iPhone sales will increase in a significant manner once it has its 5G phones on the market in the next 12-24 months, as Weiss and others do, the latest lull in earnings ought to be short-lived.
Bottom Line on AAPL Stock
It’s hard to argue with Warren Buffett’s giant-sized position in AAPL stock.
It’s not perfect by any means, but it presents the best combination of value and growth. For this reason, it is my favorite of the FAANGs.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
