Source: Apple.
Apple (AAPL 0.75%) is one of most widely held, widely covered, and heavily scrutinized stocks on the market today. Hundreds of millions love its products, and many of these consumers wish to own stock in the company. We've heard over and over the arguments that Apple is a compelling long-term investment that gushes cash, is cheap on any conventional valuation metric, and should probably trade significantly higher. I am long Apple and believe that in time, the market will acknowledge these facts and the stock will trade significantly higher.
Today, I want to look at the company purely as a safe vehicle for those not seeking outsized returns but rather preservation of real purchasing power.
Let's define risk
Risk, to me, is not the value of my Apple stock as it drops 20% in a month or week, but rather the permanent loss of my capital. If you hold Apple stock, just like any other stock or a broad market index, you are bound to experience dozens of 10% drops over a 30-year period. This doesn't concern me, nor should it concern any long-term investor.
Another element of risk is having inflation eat away at your real purchasing power. If you stick $1,000 under a mattress or in a low-interest checking account for a decade, you're engaging in some very risky financial behavior. A can of soda that cost $1 when you "put your money safely away" might cost $1.50 when you pull it out. I think holding Apple stock nearly eliminates both of these risks.
Permanent loss of capital
The chances that an investment in Apple stock will lead to a permanent loss of capital any time in the foreseeable future seems slim to none. The company's massive cash hoard, $50 billion-plus in net income, growth in emerging markets, expansion into new products, and low valuation make any steep permanent decline in share price at these levels appear very unlikely. Apple sports a forward P/E of under 12, which is well below that of the S&P 500 overall. If we take that number ex-cash on the balance sheet, it's even lower.
Steve Jobs and now Tim Cook have proved to be conservative capital allocators who don't desire to "empire build" through acquisitions. Apple could buy massive companies with its cash hoard, and I'm sure many other CEOs would have embarked on something like the AOL-Time Warner deal that destroyed so much shareholder value. The fact that they have focused on smaller acquisitions to acquire technology or talent makes me feel much more comfortable with them as stewards of my capital.
The slow drain of inflation
Let's assume that Apple's outsized growth period is over -- which it isn't -- and that it's in a steady state of growth. This growth should loosely approximate GDP expansion over the long run. This alone would prevent inflation from eating into the real purchasing power of Apple shareholders.
When we then add in Apple's dividend, real purchasing power should far outpace inflation. Currently, Apple yields less than 2% but has a payout ratio of only 22%. Purely through free cash flow, Apple could double its payout and still have a conservative payout ratio of 44%. The company chooses not to do this because it feels that buybacks are more compelling at the moment and it wants to have a sizable cash cushion to protect itself from any threats.
In the future, Apple's yield will almost certainly go substantially higher, the share price will be remarkably higher, or, most likely, there will be some combination of the two. For those who buy in now, the yield on your initial cost in five, 10, or 20 years could look astronomical.
Safest place on the Street
There are probably other publicly traded companies that are even safer than Apple when it comes to fighting inflation and preventing permanent loss of capital. But I think Apple is very near the top of the list, and none of those other companies present the potential upside of the giant from Cupertino. If investors have a time horizon of five to 10 years or longer and want to protect their wealth with a substantial upside possibility, Apple deserves a good, hard look.
