Is Apple the Ultimate Retirement Share?

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through (at best) for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down world-class companies that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Apple (AAPL +1.17%), a company whose products need no introduction.

Although Apple only restarted dividend payments last year, after a 17-year break, its fat profits and massive cash pile mean that shareholders should be able to look forward to reliable dividend payments from now on. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel they are outweighed by the investing potential of this unique company.

Apple vs. FTSE 100
Let's take a look at how Apple, which is part of the American S&P 500 index, has performed against the FTSE 100 and the S&P 500 over the last 10 years:

Source: Morningstar. Return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

It's clear that over a 10-year time frame, Apple's returns have decimated the wider market, outperforming both the FTSE 100 and the S&P 500. Although the company's share price dropped much further than the market average in 2008, the launch of the iPhone 3G that summer proved a turning point from which the company has not looked back -- until recently. Apple's shares have fallen 25% over the last six months, leaving the company trading on a very modest price-to-earnings ratio of 10.3, despite stable earnings. Is now the time to invest in Apple?

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Apple shapes up:

Stats on Apple

Five-year average financials

Here's how I've scored Apple on each of these criteria:

Apple's score of 20/25 reflects its fortress-like financial strength -- one-third of its $450 share price is covered by cash -- along with its terrific growth record over the last decade. It's certainly possible to look at Apple as a growth stock -- something I would normally steer away from in a retirement portfolio -- but it's increasingly beginning to look like a mature, income-paying company, too.

For example, it's cheap. No, seriously -- Apple currently trades on a price-to-earnings ratio of just 10.3, well below the S&P 500 and FTSE 100 averages of 17. Although Apple's forward dividend yield of 2.3% is below the FTSE 100 average of 3.1%, it is in line with the S&P 500 average of 2.2%. It's hard not to conclude that Apple represents excellent value for money at present -- unless you believe that its sales or earnings are likely to start dropping.

My verdict
My view on Apple is that it is unlikely to sustain the level of growth seen over the last five years, as it faces growing competition and saturation in the smartphone and tablet markets. Yet it has a strong, premium brand and substantial market share across these sectors, as well as in its older laptop and desktop PC business. These areas combined should be a cash cow that will sustain Apple's profits for some years -- speaking personally, everyone I know under the age of 60 has a smartphone, and many of them are buying tablets to replace their aging laptops, rather than buying new laptops.

There are two questions for retirement investors: can Apple maintain its record of creating disruptive new products, and will it maintain and increase its dividend payout over the medium term?

I think that Apple's creative juices and technical know-how will result in more groundbreaking products -- perhaps the much-rumored Apple TV, which could do for televisions what the iPhone did for smartphones.

My main concern is over Apple's dividend -- I'm pretty sure its safe, but I'm not expecting it to rise very quickly. If this concerns you too, then I would strongly suggest you consider the alternative share I mention below -- it's a classic income stock that could help your retirement income stay ahead of inflation.

2013's top income stock?
The utility sector is known for its reliable, above-average dividends, but the Motley Fool's team of analysts has identified one FTSE 100 utility share that they believe offers a particularly high-quality income opportunity.

The company in question offers a 5.7% dividend yield and the Fool's analysts believe that it could be worth up to 850 pence per share -- offering new investors a potential 20% gain on the current share price of around 700 pence.

Indeed, the Motley Fool's analysts are so confident in this share that they've named their report "The Motley Fool's Top Income Stock For 2013"! This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.

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