Apple (NASDAQ:AAPL) is the largest investment in Warren Buffett’s Berkshire Hathaway stock portfolio. And Apple shares have been a terrific investment over the last decade.
If I’d invested £1,000 in Apple stock 10 years ago and reinvested the dividends I received, I’d have an investment with a market value of £13,555 today. I think this is a significant gain.
A lot of that return is due to the value of Apple shares increasing – the company’s earnings per share (EPS) has gone from $1.42 to $6.11. But why has this happened and can it continue?
Revenue and profit
The first reason Apple’s shares are more valuable today is that the company makes more money. This is a result of higher revenues and margins.
Revenue growth at Apple has primarily come from its products division. iPhone sales, in particular, have been growing at just over 8% per year over hte last decade and make up 47% of total revenues.
Despite this, the iPhone only accounts for around 16% of new phone shipments globally. That gives me reason to think there’s still room to grow and Apple’s revenue growth can continue.
Inflation notwithstanding, Apple’s profitability has been helped by improving margins over the last 10 years. This is the result of growth in the company’s higher-margin services division.
A decade ago, services accounted for 9% of revenue. Today, that figure has increased to 21%.
Perennial antitrust issues look to me like the biggest obstacle to this trend continuing. But as long as Apple is allowed to persist with the way it runs its App Store, I’m optimistic on this front, too.
Dividends and buybacks
The other reason Apple’s shares are worth more today is the company has increased its shareholder returns. This has come through dividends and share buybacks.
Apple’s dividend has increased from $0.41 in 2013 to $0.90 today. And with the company’s dividend only accounting for 13% of its free cash flow, I think there’s scope for this to grow further.
At today’s prices, the dividend yield on Apple stock is only 0.6%, though. Share buybacks have accounted for much more of the company’s shareholder return.
Over the last 10 years, Apple has lowered its share count by 37%. That means each remaining share has a greater claim on the company’s total earnings.
I expect the pace of share buybacks to decrease in the future. Apple has been using its excess cash to repurchase its shares, and the amount of excess cash on its balance sheet has been decreasing.
Despite this, I still expect the company to be able to repurchase its shares at a significant rate using the cash it generates from its operations.
A stock to buy
Apple shares have been a remarkably good investment for Warren Buffett and the Berkshire Hathaway shareholders. And the future also looks bright to me.
I think the company will grow more slowly going forward as the pace of share buybacks slows. But I expect the business to keep growing and I’m buying the stock for my portfolio.
