We don’t invest in Apple stock and we probably never will given its current mix of businesses. That may come as a surprise considering that Apple is the largest publicly traded company in the United States.
It will come as an even bigger surprise when you learn that Apple pays a dividend, has increased that dividend at a 25%+ compounded annual growth rate over the last five years, has loads of cash on the balance sheet, and trades at a discounted price-to-earnings multiple.
For a dividend focused, value conscious investment firm like ours, that sounds like an inside straight.
The Relative Performance Crowd Has to Own Apple
The closet indexing crowd certainly looks at us askance for taking Apple off the field of play. Apple accounts for over 3.5% of the S&P 500 index market capitalization, and an even greater percentage of U.S. dividend payers. Excluding it from your portfolio is asking for trouble from the folk who obsess over short-term relative performance. Last year the relative performance cost of not owning Apple at a market weight was 1.6 percentage points.
Don’t be a Relative Performance Chaser
Fortunately, we aren’t in the relative performance game, and have long advised against such an approach for individual investors. Individuals should be building portfolios to meet their financial goals and objectives. How much income you need in retirement, the cost of college for your children or grandchildren, and the amount of money you would like to pass on to heirs has nothing to do with the performance of the S&P 500, or any other index.
While Apple has many positive statistical attributes, the quantitative data doesn’t tell the whole story. The probability of disruption in the smartphone industry isn’t captured on Apple’s income statement or balance sheet. We view the risk of disruption at Apple as being much higher than it is at other firms.
Technology is a competitive business and consumer technology is even more competitive.
Our view on Apple is informed by risk and historical experience, but we understand that we don’t have the definitive answer on what lies ahead for the smartphone or Apple shares. With the benefit hindsight and rising stock prices to point to, many investors in fact disagree with our position.
We don’t see that as a problem. We recognize that it is the news that follows the stock market, not the other way around. Ponder that the next time you read a press report about Apple.
Our investment strategy seeks to avoid the elevated risk of disruption in a company like Apple. We are going to be wrong on some stocks, Apple may be one of them, but that’s OK. We approach Apple as we approach all businesses with an elevated risk of disruption.
Apple Didn’t Invent the Smartphone
The smartphone landscape is littered with failure. After all of the success Apple has had, one may think Apple invented the smartphone, but that company was actually IBM.
In November of 1993, IBM and BellSouth announced the Simon smartphone. It wasn’t called the smartphone then. It was called a personal communicator phone.
A press report from the time read “Designed by IBM, Simon looks and acts like a cellular phone but offers much more than voice communications. In fact, users can employ Simon as a wireless machine, a pager, an electronic mail device, a calendar, an appointment scheduler, an address book, a calculator and pen-based sketchpad—all at the suggested retail price of $899.”
The Simon was cutting edge for its time. It had a green LCD screen, a memory expansion slot, fax capability, and even a graphical user interface.
The Simon personal communicator was of course a failure. It was on the market for about six months and only sold about 50,000 units. IBM is no longer in the smartphone game.
More than a Decade of Smartphone Failures
Between the Simon and the launch of the iPhone in 2007, there were many attempts by a varied group of companies to succeed at smartphones.
Phillips Electronics took a shot at the smartphone with the Synergy in 1997, Nokia was in the game, Ericson gave it a try as did Motorola. And don’t forget about Palm and Blackberry.
Blackberry was probably the most successful smartphone company pre-Apple. Blackberry dominated the business market and looked poised to continue that success.
As we know today, things didn’t work out so well for these companies, or their investors. The chart below plots the performance of some of the smartphone companies’ stocks over the last two decades.
It is a pretty ugly scene. Blackberry was probably the biggest disappointment for investors as it looked to be the leader in the market, only to be suddenly dethroned by Apple. From its peak in 2008, Blackberry shares are down about 90%.
The bulls on Apple will argue that the company is different. It has an attractive service business and smartphones are stickier today than they were when Blackberry dominated the market. Perhaps that is true, but perhaps it is not. None of the bulls on Apple can tell you with any degree of certainty whether Apple is Blackberry circa 2007 or whether it will continue to succeed in smartphones.
We are of course as interested to find out as the next guy, but not with our money or our clients’ money at risk.
Jeremy Jones, CFA
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