The Beginners’ Portfolio: Was It A Mistake To Buy Apple?

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The Beginners’ Portfolio is a virtual portfolio, with all costs, spreads and dividends accounted for. Transactions are for educational purposes only and do not constitute advice to buy or sell.

There’s an old rule-of-thumb amongst long-term investors that says as long as we are happy with a company’s fundamental performance, we should take advantage of short-term panics to buy up shares cheap.

So when Apple (NASDAQ: AAPL.US) revealed a mere 18% rise in revenue for the quarter ending December, and a record quarterly profit that was only a little up on the same period last year, I watched the resulting fall in the share price and pounced.

Apple shares were added to the Beginners’ Portfolio at a buy price of $458.40.

The end of growth?

Then came Apple’s first-quarter results for 2013, and for the first time in a decade, profits fell, by 18% to £6.3 billion. And the share price today? Well, its down to $417.20, for a fall of 9% since our purchase. So was it a mistake to add the shares to the portfolio? Let’s consider a few things…

For the quarter, revenue actually rose 11% compared to the same period a year ago, but it was falling gross margins that did the damage to profits — 37.5% this time, compared to 47.4% a year ago, and pundits are expecting around 35% going forward.

But Apple did manage to shift 37.4 million iPhones and 19.5 million iPads during the quarter, and though Mac sales dropped 2%, that’s against a general fall in sales of conventional PCs of 14%.

Don’t forget the income

For years, Apple has resisted paying any dividends, instead building up a huge cash mountain to use for whatever new idea came along. And though many saw Apple as a perpetual growth company, rational folk know there is no such thing. In fact, the introduction of a dividend was a major sign that a shift towards becoming a mature company with a new focus on providing income was in progress — and at the end of the day, it’s only that eventual potential income that gives any growth company its value.

The quarterly dividend has now been hiked by a very nice 15%, to $3.05 per share, and that alone represents a 3% yield over the full year. But it’s not the end of it — Apple intends to return a total of $100 billion to shareholders by the end of 2015, partly through a big rise in its share buyback programme from $10 billon to $60 billion.

Apple shares are on a price to earnings (P/E) ratio of only around 10, which is way down from a five-year high of nearly 40, and that provides even more evidence to me that the shares are currently priced as a long-term income-paying investment — and that’s no bad thing.

You may not be surprised to learn, then, that I’m still happy for the portfolio to hold Apple shares, because I do think it will be a nicely profitable investment over the next decade or two.

The timing

But I do have one doubt — whether it was wise to dive in just after the 2012 Q4 results, or whether I should have waited another quarter or two. With hindsight, I could have got in at a better price had I waited. But over the 20 years or so that I’ve been investing in shares, one thing I have become convinced of is that trying to time your investments is a mug’s game.

So I got shares that I think were a bargain, even though they went on to become a bigger bargain. I can live with that.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Apple. The Motley Fool UK owns shares of Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.