Apple: Defensive High-Tech Stock With Strong Buy-And-Hold Potential
Investing.com | Apr 09, 2018 10:31
High growth technology stocks had an impressive 2017, gaining more than 30% over the course of the year. But 2018 hasn't been nearly as promising and the investment climate for this space remains uncertain. Some of the sector's top technology stocks—including such high profile equities as Google (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR)—are under extreme selling pressure. Still others are struggling to find a direction.
Investors who may once have been hoping to achieve triple-digit gains by picking some of these high-octane growth stocks are now confused about the future of their money. In this environment of despair, however, I still see some tech stocks offering good value to investors who have patience and a long investment horizon.
As a buy-and-hold investor, you should pick stocks based on a company's long-term business prospects. Increases in the stock price over years mainly occur when the company's fundamentals—such as its earnings and sales, the expertise and vision of its management, and its position in that industry—are all working well. With these considerations in mind, I believe Apple is a great addition for any buy-and-hold portfolio. Here is why.
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Apple shares have done nothing for investors so far this year. Its price is down more than 2%, mainly hurt by increased market volatility and investor uncertainty about the future growth of the company's flagship iPhone business.
However, I think investors have inappropriately been lumping Apple into the high-growth technology category of stocks which they expect to bring in hefty capital gains each year. As I see it, Apple is actually more a consumer goods company, offering an attractive opportunity for investors looking for handsome returns, including dividends and share buybacks.
When you consider Apple as a consumer goods company instead of a tech firm, the stock looks like a great candidate for long-term investment. According to analysts’ consensus forecast, Apple's revenue and earnings are expected to rise 14% and 24%, respectively, this year. Yet Apple’s stock trades at just 13 times forward earnings.
That forward multiple looks very attractive when compared to other consumer staples companies which command a wide economic moat in their respective industries . Procter & Gamble (NYSE:PG), for example, trades at 17 times forward earnings, but analysts expect its earnings to grow just 7% this year. Colgate-Palmolive (NYSE:CL) trades at 22 times forward earnings, yet Wall Street expects its earnings to only rise 11% this year.
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When its comes returning cash to investors, Apple is extremely well positioned to pursue that strategy aggressively. Since the company resumed its dividend program in 2012, Apple has raised its quarterly dividend payout every year at a compound annual growth rate of 10.7%.
Some top analysts, including those at Citi Research, now believe Apple will use tax reform proceeds to significantly increase its stock buyback and dividend program. "Looking ahead, we expect investor focus to be on the impact from Apple's capital returns strategy, which we estimate could be a $100 billion increase,” Citi analyst Jim Suva wrote in a note to clients last week.
Suva, while reaffirming his $200 price target for Apple shares (the stock closed at $168.38 this past Friday), predicts that during its next earnings call, tentatively scheduled for Tuesday May1, Apple will raise its capital return program to about $400 billion from its current $300 billion authorization.
This renewed focus on the company’s cash return program doesn’t mean that Apple is lacking in innovation and new ideas. I still think Apple has a lot of potential to surprise The Street despite some signs that its “super growth” cycle is peaking.
Last week, Bloomberg News reported that Apple is preparing to build some of its own chips for Macs in 2020. That would make it easier for Apple to more closely integrate hardware and software without waiting for Intel (NASDAQ:INTC), its current supplier, to build a new chip. Apple is also working on technology aimed at letting people control the iPhone without having to touch the screen.
Apple's Services segment—which includes Apple Pay, Apple Music, AppleCare and iTunes—is gaining momentum and has started to contribute more in the company’s top line. Revenues from that business alone rose 18% annually, accounting for 10% of Apple's top line.
The Bottom Line
At a time when investors are increasingly concerned about the high valuation of FANG stocks, particularly following the revelation of Facebook data breaches and the likelihood of new government regulations, Apple is a defensive stock in this group. Its business model doesn’t rely on consumer data to make money.
Now more than ever, it makes sense to treat Apple as a high-growth consumer goods stock that's a perfect candidate for the buy-and-hold investors.
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