Beginners' Portfolio: We Buy Apple!

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What's happened to Apple (NASDAQ: AAPL  )  Has it gone bust? That's what my mum asked me yesterday and, judging by the latest media drama, she can be forgiven for thinking so.

But all that has happened is Apple's first-quarter earnings report hasn't quite satisfied the sky-high expectations of some of the world's analysts.

Shock, horror!
For the three months ending December, Apple's revenue grew by only 18% to a record $54.5 billion! Profit for the quarter also reached a new high, but it was only slightly up on the same quarter last year -- $13.08 billion compared to $13.06 billion.

Apparently there was also a shortfall in iPhone sales. Instead of the 50 million units predicted by some pundits, Apple only managed to shift 47.8 million of them!

What happened to the share price? Already falling due to slowing growth fears, it crashed. At $450 today, it's now down 36% from its September peak of more than $700. How does Apple's valuation stack up against historical records? Take a look at this table...

Year

Sales

EPS

Stock Price

P/E

Dividend

2009

$43 billion

$9.10

$185

21

0%

2010

$65 billion

$15.20

$284

17

0%

2011

$108 billion

$27.70

$381

15

0%

2012

$157 billion

$44.20

$667

15

0.4%

2013*

 

$46.70

$450

9.6

2.4%

2014*

 

$53.80

$450

8.4

2.4%

Share prices for 2013 and 2014 are yesterday's closing price. Dividend yields for 2013 and 2014 assume the current $2.65 per quarter payout is maintained, though it is more likely to rise than fall. *2013 and 2014 figures are estimated.

Now, if you think that price-to-earnings (P/E) ratio of 9.6 is low, also bear in mind that Apple has cash and cash equivalents on its books worth approximately $146 per share. That means the actual business itself is valued at $450 minus $146 per share, or $304. And that gives us an effective P/E of just 6.5!

Growth-share valuation
With a growth share, optimism often drives its P/E way higher than average, based on expected future earnings growth. The long-term average P/E for the FTSE is around 14, but we often see U.K. growth shares on P/E ratios of 30, 40, 50 or more. And they're often justified -- for a while, at least. But ultimately, earnings growth must slow as a company matures, its markets mature, and its market share steadies.

The trouble is, investors rarely see it coming in time, and rush for the exits when the first lower-then-expected earnings report comes in.

But what we're seeing with Apple is a relatively slow decline in P/E, as earnings have risen to match expectations, while the share price has still gone up but at a slower rate. For the last two years, Apple shares have already been trading on P/E values of around 15, which seems modest to me, and a long way from growth-share overvaluation territory.

We're buying
With Apple just at the start of its dividend-paying phase, and on an effective P/E of only 6.5 for the business itself, that is just too cheap. We're buying. The $450 price I've quoted so far was yesterday's closing mid-price, so here's the real deal:

We got two shares for 605.98 pounds, including commission and exchange rate spread. That's more than our 500 pound-per-share allocation, but the alternative was to buy only one. I'll add Apple to the portfolio table when I do our next valuation update.

Finally, as you know, I consider income from dividends to be a core part of a long-term portfolio -- whether you take the income as cash or reinvest it in more shares, there's nothing wrong with good old cash, whatever your strategy.

And that's why I recommend the BRAND-NEW Fool report, "The Motley Fool's Top Income Share For 2013," in which our top analysts identify a share that they believe will provide handsome dividend income for years to come.

But it will only be available for a limited period, so click here to get your copy today.

The free report "10 Steps To Making A Million In The Market" is also one I'd urge beginners to have a read of, because it's inspirational and it really does make a convincing case for the great potential of long-term investing in quality companies.

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