Consider that Apple's P/E is 24.5 and Microsoft's P/E is 13.4. Basically, while Apple may be in demand right now, Microsoft is earning almost twice as much.
Also, Microsoft pays a (albeit small) dividend, whereas Apple does not.
the difference implies that the market is assigning a higher multiple to AAPL presumably on the basis of growth. Whether that is warranted or not, I do not know.
I actually think it is more useful to look at these companies from a yield perspective. So if you take the free cash flow / enterprise value of each company you get:
10.8% for MSFT and 6% for AAPL. This is in line with what you said (MSFT producing greater earnings) but presents the data in a more readable manner I think.
Is it just me that thinks it's insane that companies can permanently plan to not pay (or pay small) dividends?
If market trading is solely based on the ability to resell stock at a higher price how is the market expected to select companies that deliver real value to the economy?
Surely the ability of a company to consistently and stably deliver dividends to the stock holders would be the best measure of success, re-investment cases aside.
Unless I misunderstand the only shareholder value in this context is the ability to flip the stock or get a piece of the action if the company is sold.
You don't need to pay dividends to increase shareholder value. It just depends on how good management is with allocating capital.
Buybacks can work just as well if you are buying back at the right price. A lot of management teams are bad at capital allocation and buyback stock at 52 week highs - that is almost always incredibly stupid.
But sometimes the business is trading at irrationally low levels and it makes a lot of sense to just buyback stock, especially if the fundamentals are in tact. I saw a company doing this and it is a great decision, their business earns a 50% return on invested capital and they have an earnings yield around 20%. It is a slam dunk strategy. When it is overvalued, you can issue stock and use it for acquisitions.
Look at Henry Singleton who ran Teledyne and used that strategy. Teledyne went from $100,000 in profits in 1960 to $238 million in 1986. Shareholders’ equity grew from $2.5 million to over $1.6 billion. Teledyne trounced the market by 4x over that period.
Using excess capital to fund accretive acquisitions, internal growth, or to invest outside of the company can work if you are disciplined in the process (most aren't). Warren Buffett became one of the richest people in the world, simply by doing this (it sure wasn't his $100K salary).
> Buybacks can work just as well if you are buying back at the right price. A lot of management teams are bad at capital allocation and buyback stock at 52 week highs - that is almost always incredibly stupid.
The stock price for buybacks doesn't matter, if you only care about getting money back into investors' hands.
Incorrect. If your stock is overvalued, a buyback is an inefficient and destructive method for getting money back into shareholders hands. You would be better off giving a special dividend instead.
If you spend $100M buying back stock at the top of the market and then the next year, the bubble pops and your stock is down 50% was that really good capital allocation?
For every dollar you spent, you have effectively lost 50 cents. Sears admitted as much back in 2007 when they were buying back stock at $180 only to watch it drop to $90 a few months later. Remember, the idea with buybacks is to reduce overall share count so that you boost EPS and in turn your share price.
The amount you can retire might double if you simply wait out a bubble period. That's why dividends and buybacks need to be looked at relative to where the stock valuation is. When your stock is trading at a peak valuation, if you want to release value to shareholders, you are much better off using a dividend than a buyback.
You can play the stock market, and you can put money back into investors pockets.
If you want managers to play the stock market, your comments are spot on--but you shouldn't restrict them to buying only shares of their own company. If they are good at predicting when valuations are high and going lower, or the other way round, you should open an investment fund and profit from their expertise.
Most companies aren't in the business of playing the stock market.
If you just want to transfer money from the company to the stock holders, you can either issue dividends or buy back shares at any time there's excess cash. Apart from taxation issues, there's no difference between share buy-backs and dividends in terms of getting money back to the investors.
The theory is that Apple can spend the money better than the investor, by using it to do more R&D, make new products, and make the portion of the company represented by the share more valuable. In growth mode, that's not unusual.
In companies that can't do much R&D, you see much more dividend action, for example, natural resource stocks are high dividend, since there's near nothing they can do to reinvest, at least not with everything they pull in.
Simply put, the market sees more growth in Apple than they do in Microsoft. Microsoft has been trying to grow for a while now, which since they own such as large share of the OS/Office market, means expanding into new markets.
They have had some success with xbox, but overall they are yet to be in the black there. There is still a chance to grow with the online services. If they can get the xbox positioned as a general entertainment devices in enough peoples homes, but it may be too expensive for that. You have google coming into this space now, and they are going to do things very cheap.
Zune hasn't worked out for them.
They lost there way with Windows Mobile, it seems they just forgot about it, just as they did with IE.
IIS has started to falter, and .Net has seen some great growth, but looks like stagnating now as well.
Whereas Apple have some exciting products coming out, that seem to do very well.
On the other hand Microsoft is in a position where they can deliver the best integration of your web, desktop, mobile and living-room devices and has the resources and skill to do so.
They probably don't do it because they are such conservative douche-bags and don't want to threaten their cash-cows, but I wouldn't bet against them in case the money from Windows / Office stop flowing and they end up in a position where they either compete or die.
Microsoft's P/E is heavily "discounted" because it's considered a sort of swan song of easy money (the Windows and Office empire that they've coasted on). Apple's is considered the beginning of things. Stock value today isn't based on today, it's based on "tomorrow".
Just so you know, Goldman Sachs' P/E has nothing to do with this discussion. GS is a player in an entirely different industry and it is useless to compare this one statistic between two tech companies.
>Goldman Sachs' P/E has nothing to do with this discussion
Nothing? Don't you think that's a little strong?
P/E reflects growth prospects, and a large, established financial company has limited growth prospects. Just as a large, established, coasting tech company tends to have lower P/E ratios. GS lives in an industry with lower P/E ratios, but saying that it has "nothing" to do with it is terribly wrong.
I am in the midst of studying for a hefty financial certification exam right, so your comment reminded of something that is frowned upon in the financial industry.
Its not that what you're saying is completely wrong, just unnecessary.
A P/E ratio is useful, but it requires lots of context. You provided no context and mentioned a stock that shows little to no correlation to the tech industry and plus the financial industry is somewhat "messy" right now.
I suggest you look up some other large established banks and their P/E ratios right now. For example, Morgan Stanley (MS) has a P/E of 98. Does that mean they have that much more growth potential? Maybe it means that GS is currently undervalued with all the negative press they are getting recently? A low P/E could also be a sign of being undervalued, just as a high P/E can a sign of being overvalued.
On the other hand, the tech industry is proving to be quite lucrative lately. Apple has released the iPad and is coming up on their WWDC and there is plenty of speculation concerning iPhone 4G and mobile advertising opportunities. With all the media attention Apple gets, their "friendly" design, and their phenomenal advertising campaigns, isn't it quite possible that they are overvalued? As soon as a viable Windows 7 based tablet comes out that lets you torrent, play divx via divxplayer and flash, don't you think the iPad might be a little more than fucked in its current incarnation/closed environment? And who knows, maybe Microsoft is undervalued right now seeing as two execs have left? Its at a fairly low share price (historically speaking) right now.
tl;dr Fundamental analysis is complicated enough as it is, don't throw in unrelated numbers.
You are missing the point, GS is a horrible example to compare to anything but other financials right now. We have upheaval in the financial market around the world along with new regulations coming down a year after they were basically bankrupt and had to be bailed out by the government. What about that is established, limited growth prospects etc.
There are plenty of other large cap companies to compare MS to that are far more applicable, look at Proctor and Gamble's P/E is 16.06. Colgate Palmolive's is 19, IBM's is 12. Those are more comparable/normal.
So you're going to provide another poster's "point"? Their point was that they were two different industries, which is entirely fair. Your point is something entirely different altogether, yet you're speaking on their behalf.
P/E is often a farcical metric, yet you know I'm not the one who brought P/E into the discussion, yet here we are.
Who says that? They could be at the top of their game right now and not see more growth and stabilizing and/or decreasing in the future. There is no way to tell, otherwise you'd be very rich already ;)
> Stock value today isn't based on today, it's based on "tomorrow".
Who says that?
Many believe that Apple stocks are overvalued today, that's for sure. Oh, and again, there is no way to tell the future.
. There is no way to tell, otherwise you'd be very rich already ;)
Conversely, the aggregate opinion of investors does has some value. Otherwise you could make a fortune betting against any stocks with high P/E ratios.
Many believe that Apple stocks are overvalued today, that's for sure.
Sure. And just as many believe it's undervalued, otherwise the current price would be lower than it is. This is true for any stock.
> "They could be at the top of their game right now and not see more growth and stabilizing and/or decreasing in the future."
In the future, anything's possible. But the future is almost always a function of the past, and current trends indicate anything but a decline in Apple's growth.
Also, Microsoft pays a (albeit small) dividend, whereas Apple does not.