Apple reported its first drop in profit in a decade but at the same time announced plans to more than double the amount of cash it returns to shareholders via share buybacks to $100bn by the end of 2015. Quarterly revenue was up 11% on a year ago and the dividend was increased by 15%.
“We currently hold around a 4.5% weight in the Tech funds which is significantly less than the benchmark weight of approx. 10%”, explains Stuart O’Gorman, Head of Global Technology in Henderson, signaling that the underweight position has benefited relative returns in the strategy as Apple has fallen over 40% from its peak to its current price. “The 15% increase in the dividend leaves the stock yielding 3% providing valuation support,” he adds.
Despite the attractive valuation, O’Gorman is concerned that Apple’s revenue growth and earnings will remain under pressure due to slowing demand for iPhones and greater competition from peers such as Samsung. “Margins have fallen from over 47.4% a year ago to 37.5% as competition intensifies and they add cheaper products, such as the iPad Mini. Guidance implies more of the same”, O’Gorman explains, adding that CEO Tim Cook announced that new products are in the pipeline for later this year and 2014, without giving specific details, leaving investors wondering if the company can continue to innovate as successfully and at the same pace as they have over the last decade.
“Our thesis historically, when we were positive on the stock, was tied to a belief in the advantages of their platform, underpenetrated markets, scale advantages and – to a lesser extent – innovation edge and brand. A lot of this has eroded.” On O’Gorman’s view, Western smartphone markets are increasingly fully penetrated and Samsung has the advantage on scale. Regarding the platform, this remains a significant barrier to entry for existing customers but no longer appears an edge for attracting new users
“Protecting the stock on the down side is their huge cash balance, continued very strong free cash flow generation and attractive valuation against these metrics. Their increased willingness to return cash to shareholders is also a positive.” On balance, Stuart O’Gorman’s team remains neutral to negative on the outlook for the company and feels no need to add to positions, despite the stocks sharp fall, “given that we can find more interesting investment opportunities elsewhere”, he concludes.
Stuart O’Gorman is Head of Global Technology and joined Henderson Global Investors in December 2000 as co-Head of Technology. Prior to this, Stuart worked at Scottish Equitable and co-managed the Scottish Equitable Technology Fund. Stuart holds a Masters degree in Financial Economics and a Diploma in Investment Analysis from the Universities of Dundee and Stirling respectively and is an Associate Member of the Society of Investment Professionals.