Apple posted quarterly revenue of $39.2 billion and quarterly net profit of $11.6 billion, or $12.30 per share (an increase of 94% in net income). These results compare to revenue of $24.7 billion and net profit of $6.0 billion, or $6.40 per diluted share, for the same quarter in 2011. Apple’s Gross margin was 47.4% (the best ever) compared to 41.4% in the year-ago quarter. International sales accounted for 64% of the quarter’s revenue.
Apple sold 35.1 million iPhones in the quarter, 88% unit growth over the year-ago quarter. Apple sold 11.8 million iPads during the quarter, a 151% unit increase over the year-ago quarter. And they sold 4 million Macs during the quarter, a 7% unit increase over the year-ago quarter. Apple sold 7.7 million iPods, a 15% unit decline from the year-ago quarter.
“Our record March quarter results drove $14 billion in cash flow from operations,” said Peter Oppenheimer, Apple’s CFO. “Looking ahead to the third fiscal quarter, we expect revenue of about $34 billion and diluted earnings per share of about $8.68.” Don’t be surprised to see Apple significantly beat these numbers, they usually provide “estimates” that are far bellow what results turn out to be.
Apple built their cash stockpile to over $110 billion. Even paying the dividend that they have announced, they are going to be building their cash stockpile going forward without some amazingly large purchases. The announced dividend will cost Apple about $10 billion annually. I wish Apple would increase the dividend. They have also announced a plan to repurchase about $10 billion in stock starting in about 6 months. That would be a huge commitment for most companies, for Apple it seems to be about 2 months of cash the business will generate. I worry they will make foolish purchases just because having that much sitting in the bank makes it so easy.
The results are again fantastic. Apple’s stock price, relative to earnings, continues to be very reasonable (even cheap). Increases in the stock price have been more than outpaced by profit growth. It does seems profit growth has to slow, and likely dramatically (of course it seemed incredibly unreasonable to expect increases of even 33% of what Apple has done in the last 3 years). The stock price is not expensive, even if earnings growth collapsed, which it isn’t expected to do in the next year. On fundamental factors the stock remains very attractive.
The biggest risk is that when so much has gone so right for Apple for so long aren’t they poised to suffer some major setbacks? I can accept the case for a dramatic slowing in earning for the iPhone, which is their primary driver of earnings. It is hardly certain but there is this potential. I don’t foresee significant actual declines (earning less in 2013 than 2012, for example). But even assuming no growth in iPhone profits from 2013 to 2016 at this price Apple seems to be a good investment (and few expect no growth for iPhone earning for that period). iPhone sales now account for 58% of Apple’s revenue; three years ago, they totaled 27% of revenue.
Other areas should be strong in 2012, 2013 and beyond: iPads, Macs, iTunes and App sales. And everyone is expecting some huge new product or products. The leading candidate is a new Apple TV that actually makes a big move into the market. The stock price doesn’t even need some big new product but if it comes that is just more reason to be positive on Apple as an investment.
I don’t see any signs of troubles brewing. The only reason to be nervous is that it seems crazy that such extraordinary success on such a huge scale can continue. That can explain being nervous but it doesn’t justify missing out on this attractive investment.
Related: Apple’s Impossibly Good Quarter – The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects (Sept 2011) – Leadership quotes from Steve Jobs – Intel Reports Their Best Quarter Ever (March 2010) – 12 stocks for 10 years portfolio
Tesco is in my 12 stocks for 10 years portfolio. One of the big reasons I bought is management’s commitment to using good management practices, in particular lean thinking (based on Toyota’s management principles). These principles include: investing in the long term, customer focus, respect for employees.
With those practices in place and the good international expansion potential (including the USA) the opportunities are good (thus I liked the investment). Short term hiccups don’t really bother me. I would rather avoid them but I can accept them. The think that worries me about Tesco is I am becoming less and less convinced they are committed to lean management principles. Instead they seem to just be practicing the same lame management that so many companies employ. They can still be successful that way but the lost value to shareholders is great and makes me very close to deciding to eliminate my investment. I already sold half of the position, last year.
I now live in Malaysia and the Tesco’s here are horrible. There is no evidence of customer focus. They have lousy “fresh” (often not) vegetables. It is very easy to be sloppy as you expand. They obviously are not concerned enough to practice lean thinking in Malaysia. That is a concern. But large organizations often struggle to manage themselves competently and one small area ignoring lean thinking principles isn’t enough to say Tesco is ignoring them completely. More and more evidence is pointing to Tesco being sloppy and ignore lean thnking, however.
The main current financial problems are in the home market issues not directly related to lean thinking. Those I could easily chose to wether, if I believe the company is committed to smart lean management principle, but I am not any longer (sadly). For me, I need to see more evidence of commitment to lean principles or I will likely sell out my investment.
Another problem I have is Amazon was my other retail investment and I have significant valuation concerns – I am closer to selling more than buying more (I have sold some). I have long been looking at Costco – I would have been much better off buying it over Tesco 
I am still considering it (I would love to buy Costco, it is just a valuation concern that holds me back, the company and the future prospects look great).
I lost no faith in Toyota (another stock in my sleep well portfolio) during the recent struggles. There were some slip-ups. Toyota’s responses were great – just as I would expect. Mainly the stories were greatly overblown.
Related: Tesco: Consistent Earnings Growth at Attractive Price – Apple’s Impossibly Good Quarter – Taking a Look at Some Dividend Aristocrats
Pitfalls in Retirement (pdf) is quite a good white paper from Meril Lynch, I strongly recommend it.
could safely spend 10% or more of their savings each year.
But, as explained below, the respondents most on target were the one in 10 who estimated sustainable spending rates to be 5% or less. This is significantly impacted by life expectancy; if you have a much lower life expectancy due to retiring later or significant health issues perhaps you can spend more. But counting on this is very risky.
This is likely one of the top 5 most important things to know about saving for retirement (and just 10% of the population got the answer right). You need to know that you can safely spend 5%, or likely less, of your investment assets safely in retirement (without dramatically eating into your principle.
Chart showing retirement assets over time based on various spending levels, from the Merill Lynch paper.
The chart is actually quite good, the paper also includes another good example (which is helpful in showing how much things can be affected by somewhat small changes*). One piece of good news is they assume much larger expense rates than you need to experience if you choose well. They assume 1.3% in fees. You can reduce that by 100 basis points using Vanguard. They also have the portfolio split 50% in stocks (S&P 500) and 50% in bonds.
Several interesting points can be drawn from this data. One the real investment returns matter a great deal. A 4% withdrawal rate worked until the global credit crisis killed investment returns at which time the sustainability of that rate disappeared. A 5% withdrawal rate lasted nearly 30 years (but you can’t count on that at all, it depends on what happens with you investment returns).
Related: What Investing Return Projections to Use In Planning for Retirement – How Much Will I Need to Save for Retirement? – Saving for Retirement
Warren Buffett continues to write his excellent annual shareholder letter. It is a pleasure to read them every year. I have selected a few passages to include:
Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.
Investors face challenges within their own psychology. This is one, but not the only one.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,” spells trouble in any business, but in none more so than insurance. Indeed, a good underwriter needs an independent mindset akin to that of the senior citizen who received a call from his wife while driving home. “Albert, be careful,” she warned, “I just heard on the radio that there’s a car going the wrong way down the Interstate.” “Mabel, they don’t know the half of it,” replied Albert, “It’s not just one car, there are hundreds of them.”
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. In the first few years after we acquired it, General Re was a major headache. Now it’s a treasure.
The insurance business is explained well in this, and his other shareholder letter.
Related: Warren Buffett’s 2010 Letter to Shareholders – Warren Buffett’s Q&A With Shareholders 2009 – Warren Buffett’s 2007 Letter to Shareholders
Apple has been performing amazingly well for years. They keep producing blockbuster hits over and over. Not only are these hits enormously popular they are enormously profitable.
The only real objections to Apple’s stock I can see are: the overall market value is so huge it just has to collapse (over $400 billion – the largest in the world) or it has to be time for a huge reversal of fortunes.
The problem with the view that it will fall is that the stock is very cheap by any rational measure. You are not paying much for all the earnings. Even if Apple does not continue the trend of the last 5 years, if it just stopped growing altogether, it is still cheap (if it does continue that trend it will break $1 trillion by 2014 – but I don’t think it will). The biggest risk is the profit margin shrinks drastically. That is possible. It is even somewhat likely to shrink a fair amount. But there isn’t much reason to think revenues will not grow. And to me, the current price makes sense only if revenues fall and profit margins fall. It takes the worst case scenario to make this stock seem overpriced.
The data on the last quarter (and for 2011 overall) are impossible (except they actually happened).
- record quarterly revenue of $46.33 billion ($26.74 billion in 2010)
- record quarterly net profit of $13.06 billion ($6 billion in 2010)
- Gross margin was 44.7 percent compared to 38.5 percent in the year-ago quarter
- $17.5 billion in cash flow from operations during the quarter (and $38 billion in the last year)
- $100 billion in cash now ($97.6 billion to be exact but since the data was gathered they probably passed $100 billion anyway). That is more than the market cap of all but 52 companies in the world.
You can’t grow quarterly sales from $26.7 billion to $46.3 billion. $26 million to $46 million, fine that is possible, billions however – not possible. Except Apple did. You can’t grow a $6 billion quarterly profit to $13 billion in 1 year. Except Apple did. You can’t generate a cash flow of $17.5 billion in a quarter. Except Apple did. You can’t have a stockpile of $100 billion in cash. Except Apple does. These figures would not have been seen as unlikely just 3 years ago. They were impossible. But Apple achieved them.
These figures are not short term blips. They are the latest in a long stream of amazingly results.
Related: How Apple Can Grow from $200 Billion to $300 Billion In Market Cap – Apple Tops Google (August 2008)
Apple has numerous, incredibly strong businesses. Each could be the linchpin of an extremely valuable company.
- iPhone initial sales and reoccurring income (over 50% of Apple’s revenue)
- app sales (for iPhones, iPads and Macs)
- iPads
- iTunes
- Macs
- Their retail store business – selling all their products
The 12 stock for 10 years portfolio consists of stocks I would be comfortable putting into an IRA for 10 years. The main criteria is for companies with a history of large positive cash flow, that seemed likely to continue that trend. I am considering adding Abbot to the portfolio, and maybe dropping Cisco.
Since April of 2005 the portfolio Marketocracy* calculated annualized rate or return (which excludes Tesco) is 5.7% (the S&P 500 annualized return for the period is 3.9%). Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that (it is not like this portfolio takes much management), the return beats the S&P 500 annual return by about 380 basis points annually (it would be a bit less with Tesco, but still close above 3%, I would think – calculating rates of return with purchases and sales and dividends is a complete pain, which is one reason Marketocracy is so nice).
The current stocks, in order of return:
| Stock | Current Return | % of sleep well portfolio now | % of the portfolio if I were buying today | |
|---|---|---|---|---|
| Amazon – AMZN | 350% | 9% | 7% | |
| Google – GOOG | 187% | 17% | 14% | |
| PetroChina – PTR | 115% | 8% | 6% | |
| Templeton Dragon Fund – TDF | 85% | 8% | 7% | |
| Templeton Emerging Market Fund – EMF | 44% | 5% | 7% | |
| Danaher – DHR | 43% | 10% | 10% | |
| Apple – AAPL | 42% | 9% | 9% | |
| Intel – INTC | 18% | 6% | 6% | |
| Cash (likely to be ABT soon) | - | 4% | 6% | |
| Cisco – CSCO | -2% | 5% | 4% | |
| Toyota – TM | -8% | 8% | 12% | |
| Pfizer – PFE | -9% | 6% | 7% | |
| Tesco – TSCDY | -13%** | 0%* | 5% |
The current marketocracy results can be seen on the Sleep Well marketocracy portfolio page.
Related: 12 Stocks for 10 Years: Feb 2011 Update – 12 Stocks for 10 Years, July 2011 Update – 12 Stocks for 10 Years, July 2009 Update – hand picked articles on investing
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See the full list of Dividend Aristocrats below. The stocks in this index are companies within the S&P 500 that have increased dividends every year for at least 25 consecutive years. After 10 were added and 1 removed, this month, there are now 51 companies included (so just over 10% of all S&P 500 stocks) – and remember many S&P 500 stocks haven’t existed for 25 years, or pay no dividend today, or didn’t 10 or 20 years ago (Google, Apple, Intel, …). It is surprising so many companies have successfully done this.
I’ll take a look at a few of them here (I looked at the new additions in my previous post: Investing in stocks that have raised dividends consistently).
| Stock | Yield |
|
div/share 2011 | div/share 2000 | % increase |
|---|---|---|---|---|---|
| 3M (MMM) | 2.8% | $2.20 | $1.16 | 90% | |
| Aflac (AFL) | 3.2% | $1.23 | $0.165 | 645% | |
| Abbott Laboratories (ABT) | 3.5% | $1.92 | $0.74 | 159% | |
| Cincinnati Financial (CINF) | 5.3% | $1.60 | $0.69 | 132% | |
| Coca-Cola Co (KO) | 2.8% | $1.88 | $0.68 | 176% | |
| Exxon Mobil Corp (XOM) | 2.4% | $1.85 | $0.88 | 110% | |
| Johnson & Johnson (JNJ) | 3.6% | $2.25 | $0.62 | 263% | |
| Kimberly-Clark (KMB) | 3.9% | $2.80 | $1.08 | 159% | |
| Medtronic (MDT) | 2.8% | $0.94 | $0.18 | 417% | |
| Procter & Gamble (PG) | 3.2% | $2.06 | $.67 | 207% |
Just looking at this data Aflac sure looks appealing. Having both a high yield and strong growth is an appealing combination. And Warren Buffet agree (he owns quite a bit) which is also reassuring (he also owns a large stake in Coke). Of course strong growth over the last 11 years won’t necessarily repeat (in fact it gets much harder). On the other had some slow growth companies would likely continue slow growth (at best): Exxon Mobil, 3M…
Really almost all of these stocks are pretty attractive. Medtronic, Johnson & Johnson and Abbot Laboratories look particularly appealing to me (along with Aflac and Kimberly-Clark). I would have to do more research on any of these (other than Abbot Laboratories, which I already own) before deciding to buy, but they sure look good as safe long term investments. Health care is a growing need (in the USA and globally). It is true the costs in the USA have to be reduced, and this could make things more difficult for companies in the health care industry.
Related: Sleep well investing portfolio – Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment – Is the Stock Market Efficient?
Full list of Dividend Aristocrats, an index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.
The Dividend Aristocrats index measures the performance of S&P 500 companies “that have followed a policy of increasing dividends every year for at least 25 consecutive years.” S&P makes additions and deletions from the index annually. This year 10 companies were added and 1 was deleted.
| Stock | Yield |
|
div/share 2011 | div/share 2000 | % increase |
|---|---|---|---|---|---|
| AT&T (T) | 6% | $1.72 | $1.006 | 72% | |
| HCP Inc (HCP) | 4.9% | $1.92 | $1.47 | 31% | |
| Sysco (SYY) | 3.7% | $1.04 | $0.24 | 333% | |
| Nucor (NUE) | 3.7% | $1.45 | $0.15 | 867% | |
| Illinois Tool Works (ITW) | 3.1% | $1.40 | $0.38 | 268% | |
| Genuine Parts (GPC) | 3.1% | $1.80 | $1.10 | 64% | |
| Medtronic (MDT) | 2.8% | $0.936 | $0.181 | 417% | |
| Colgate-Palmolive (CL) | 2.6% | $2.27 | $0.632 | 259% | |
| T-Rowe Price (TROW) | 2.9% | $1.24 | $0.27 | 359% | |
| Franklin Resources (BEN) | 1.2% | $1.00 | $.0245 | 308% |
You can’t expect members of the Dividend Aristocrats to match the dividend increases shown here. As companies stay in this screen of companies the rate of growth often decreases as they mature. Also some have already increased the payout rate (so have had an increasing payout rate boost dividend increases) significantly.
The chart also shows that a smaller current yield need not dissuade investing in a company even when your target is dividend yield, giving the large dividend increase in just 10 years. Nucor yielded just 1.5% in 2000 (at a price of $10). Ignoring reinvested dividends your current yield on that investment would be 14.5%. To make the math easy 10 shares in 2000 cost $100, and they paid $1.50 in dividends (%1.5). Dividends have now increase so those 10 shares are paying $14.50 in dividends (14.5%). Of course Nucor worked out very well; that type of return is not common. But the idea to consider is that the long term dividend yield is not only a matter of looking at the current yield.
The period from 2000 to 2011 was hardly a strong one economically. Yet look at how many of these companies dramatically increased their dividend payouts. Even in tough economic times many companies do well.
Related: Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment – Where to Invest for Yield Today – 10 Stocks for Income Investors
Where is the economy headed? With the troubles of huge debt (by governments and consumers) and the possible collapse of the Euro it is very hard to be certain. And where is the stock market headed? That is also difficult to predict. Of course, where the stock market is headed in the short term is never easy to predict. If you can predict, you should be rich (though it likely takes a bit more, knowing how much to risk…).
At least by knowing what has happened you can be ahead of where many people are. The USA economy has not been in a recession, we have actually been growing. Just doing so very slowly. And doing so without many added jobs. Companies however, have been doing very well.
For investors knowing if this is a positive trend that can be expected to continue or an aberration is key. But I have no way of knowing. My guess is it is at least partially something that will continue (but maybe a portion of the gains are an aberration) – but this is just a guess. This bloomberg article looks more at the issue.
…
The margins of non-financial companies in the U.S., a widely used measure of profitability, reached 15 percent in the third quarter, according to data from Moody’s Analytics Inc. in West Chester, Pennsylvania. That was the highest level since 1969. When the recession ended in the second quarter of 2009, the comparable number was 8.7 percent.
The most compelling data supporting my belief is the long term trend.
But where this trend ends and starts reversing won’t be obvious until years after it happens. But investors that can predict (or guess) margin changes will likely be rewarded financially.
Related: The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects – Is the Stock Market Efficient? – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation
High frequency trading is rightly criticized. It isn’t bad because rich people are getting richer. It is bad because of the manipulation of markets. Those being
- Front running – having orders executed milliseconds in advance to gain an edge (there is no market benefit to millisecond variation). In the grossest for it is clearly criminal: putting in orders prior to known orders from a customer to make money at the expense of your customer and others in the market. My understanding is the criminal type is not what they are normally accused of, of course, who knows but… Instead they front run largely by getting information very quickly and putting in orders to front run based on silly price difference (under 1/10 of a cent).
- Putting in false orders to fake out the market – you are not allowed to put in false orders. It is clear from the amount of orders placed and immediately withdrawn they are constantly doing this. Very simply any firm doing this should be banned from trading. It wouldn’t take long to stop. Of course the SEC should prosecute people doing this, but don’t hold your breath.
Several things should be done.
- Institute a small new financial transaction tax – adding a bit of friction to the system will reduce the ludicrous stuff going on now. Use this tax to fund investigation and prosecution of bad behavior.
- Redo the way matching of orders is done to promote real market activity not minute market arbitrage and manipulation – I don’t know exactly what to do but something like putting in a timing factor along with price. An order that is within 1/10 of cent for less than 1,000 shares are executed in order of length of time they have been active (or something like that).
- Institute rules that if you cancel more than 20% of your order (over 10 in a day) in less than 15 minutes you can’t enter an order for 24 hours. Repeated failures to leave orders in place create longer bans.
- Don’t let those using these strategies get their money back when they do idiotic things like sell bull chip companies down to 20% of their price at the beginning of the day. You don’t get to say, oh I didn’t really mean to buy this stock that lost me 50% the day I bought it, give me money back. There is no reason high frequency traders should be allowed to take their profits and then renege on trades they don’t like later.
Speculation is fine, within set rules for a fair market. Traders making money by manipulating the system instead of through beneficial activities such as making a market shouldn’t be supported.
To the extent high frequency trading creates fundamental buying opportunities take advantage of the market opportunity. Just realize the high frequency traders may be able to reverse you gains (and if you lose you are not going to be granted the same favors).
Related: Naked Short Selling – Misuse of Statistics, Mania in Financial Markets – Failure to Regulate Financial Markets Leads to Predictable Consequences – Fed Continues Wall Street Welfare
The truth is the billions of dollars high frequency traders steal from others market returns matters much less to true investors. For long terms holdings the less than a cent they steal from other market participants is small. It is still bad. Just people really get more excited about it than they need to. I would love to just get 1/1000 of cent on every trade made in the markets, I could retire. But they are mainly stealing very small amounts from tons of different people. Now the fake orders and trades that go against them that they then get reversed are a different story.