Berko: Buy more Apple?
Friday, September 20, 2013 7:00 AM
Dear Mr. Berko:
I know you have not cared for Apple since Steve Jobs died, but I still would like your opinion. I bought 70 shares recently at $402, and almost immediately afterward, Carl Icahn invested about $1 billion in the stock. Do you think he will break up the company? Could Apple go to $700 this year? I am a long-term, conservative investor and wish to know whether I should hold or sell or buy 25 more shares.
G.J., Springfield, Ill.
Frankly, I’m modestly comfortable with Apple Inc. (AAPL-$455.32) as a long-term investment. But even if AAPL’s revenues from the smartphone market double (as expected) by 2014-15 and if the iPod and iPhone continue to sell like hot cakes, a $700 price may be light-years away. There are 54 known analysts who follow AAPL, and their consensus has a target price this year of $528. So if management doesn’t slip, trip, blunder or fumble, $528 is realistic. Their low target price is $270, and their high target price is $830, both of which I think are unrealistic. However, a $600-$625 share price might be an acceptable target for 2014 for Icahn. I think his interest in AAPL is as a passive investor rather than as a corporate raider who disembowels his target companies into various salable parts.
But there are some concerns that could change the current projections. For instance: 1) AAPL is a high-tech business, and better mousetraps (Samsung may be building one) always appear when they are least expected. Do you remember Nokia, Digital Equipment, BlackBerry, Control Data, Palm, Netscape, Gateway, Wang Laboratories, Zenith, Compaq, Atari, Burroughs, Intuit and Ampex, all of which were potentially zillion-dollar stocks? They ran out of management. 2) Steve Jobs was an iconic, creative genius like Lee Iacocca of Chrysler, Michel Bergerac of Revlon, Charles Bluhdorn of Gulf and Western, and George Eastman of Eastman Kodak. Can you imagine Amazon.com without Jeff Bezos, Virgin Group without Richard Branson, Berkshire Hathaway without Warren Buffett or Telmex without Carlos Slim? It’s unthinkable. 3) The consumer is hurting. He lacks the discretionary income he had five years ago and has less to spend today than he did before the recession bit him in the bum. AAPL – with all the new software, whistles, apps, bells, appliances and screens – must be careful that it doesn’t price itself out of the market.
AAPL must continually develop new and superior hardware, software, services and third-party apps and simultaneously fend off ambitious rivals in end markets, highlighted by short product life cycles and intense competition. And Tim Cook must avoid future screw-ups like AAPL’s map fiasco (to compete with Google Maps), a task Jobs never would have considered. However, some observers believe that Cook is exploring a search engine to compete with Google Search. Imitation may be the sincerest form of flattery, but it can also be the quickest route to failure.
AAPL pays a $12.20 dividend yielding 2.7 percent. Though that low yield is worth a song and a sixpence today, I suspect that five or seven years hence, that dividend will double, so if you decide to keep the stock (my recommendation), your current dividend yield could easily double. AAPL today reminds me very much of Microsoft Corp. (MSFT-$32.93) 10 years ago, when investors finally realized that the bloom was off the rose. In 2003, MSFT traded at $33, had $32 billion in revenues, earned 94 cents a share and paid a dividend of 8 cents. Today MSFT’s revenues have zoomed to $81 billion, and earnings for 2014 should come in at $2.94 per share. And the dividend may be increased (twelvefold) to 96 cents a share. I think AAPL’s revenues and earnings and dividend could grow just like those at MSFT. And recognizing that APPL has more than $44 billion in cash, it’s likely that the board will use that cash cache to repurchase more of its shares and continue pleasing shareholders with higher dividends each year. Therefore, AAPL may become a dividend darling and an exceptional dividend/growth stock for retirees. Consider rounding out your holdings to 100 shares.
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