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Apple: Nibbling At The Edges For 10% To 14% Yields

Apple (AAPL) has been on a royal tear this year, rising 63% so far in 2019, vs. 22.88% for the S&P 500 and ~37% for the Technology Select SPDR Fund:

Earnings:

Fiscal Q4 '19, (period ending 9/30/19), revenue growth was 1.81%, a bit higher than fiscal Q3 '19's 1% revenue growth. Net income declined -3.11%, while diluted EPS rose 4.12%.

Gross margin $ had a ~1% rise, whereas gross margin % was slightly lower:

Looking at the entire fiscal year shows revenue down ~-2%, net income down -6.7%, with diluted EPS up .68%. AAPL's huge share buyback program decreased the share count by -6.56%, which, of course, aided EPS growth. Gross margin $ fell by -3.39%, while % margin slipped by -1.37%.


Segments:

During fiscal year 2019, AAPL's largest segment, iPhones, had a 12.28% sales decline of ~$20B. While that's a huge number, the remaining segments all had sales growth, with Wearables at 40.85%, Services at 16.45%, iPad at 15.78%, and Mac, at just 2.14%. With the growth in these other segments, the total segment growth $ decline was ~$2.93B.

A glass half full viewpoint of this would point out that AAPL had a more diverse sales mix in fiscal 2019 than it did in fiscal 2018. It will be interesting to see how the 5G iPhone affects the sales mix when it comes out in 2020.


Analysts' Earnings Estimates:

AAPL has had 26 upward estimate revisions during the past three months, vs. 12 downward revisions.

The average EPS estimate for fiscal year 2020 is $13.05, which would give AAPL 9.76% growth.

Since July, AAPL has had mostly upbeat ratings from analysts, with most of them raising their price targets:


Analysts' Price Targets:

Those upbeat ratings have helped fuel AAPL's big price gains in 2019, and even with higher target prices, AAPL's price/share has still raced ahead of the average price target. At $259.78, it's already 2.8% above the $252.70 target, and ~16% below the highest price target of $310.00.


Valuations:

Compared to its sector medians, though, AAPL's trailing and forward P/E ratios still look cheap while its EV/EBITDA is modestly lower. As is often the case with an industry leader, AAPL is getting premium valuations for price/book and price/sales.

Historically, however, AAPL's current 21.85 P/E is at its highest point over the last five years:


Financials:

AAPL's ROA, ROE and EBITDA margin are all significantly higher than sector medians, while its modest debt/equity leverage is similar.


Dividends:

AAPL has a good five-year dividend growth rate of 10.84% and a modest 25.57% dividend payout ratio. It just went ex-dividend this week and should go ex-dividend next on ~2/7/20. It pays in a Feb/May/Aug./November sequence .As strong as AAPL is, though, the problem for income investors is its very low yield of 1.19% is even lower than T-Bill rates.

Of course, many investors have made out big time in 2019 via buying and selling AAPL for capital gains, but what about income investors who don't consider themselves as traders?


Options:

One solution would be to sell options on AAPL. You can "nibble around the edges" of AAPL's price/share, and greatly increase its yield. Choosing an option expiration date will tell you what the maximum length of time is and also will establish what your maximum potential profit will be.

For example, with AAPL 2.8% above its average price target, maybe you'd want to consider selling cash secured puts below its price/share.

AAPL's January 2020 $250.00 put pays $5.00, over 6X its $.77 quarterly dividend, for a 10.28% annualized yield, giving you a breakeven of $243.95, which is 3.14% below its average target price of $252.70.


If you want to have a lower breakeven, you can sell puts at lower strike prices, however, you'll be paid a lower put premium when you sell further below a stock's price/share.

Conversely, another way to achieve a lower breakeven is to go further out in time, since the additional time value results in higher premiums. "Time is money" is certainly true in the options world.

This $250.00 put strike doesn't expire until March 2020. It pays $9.85, over 12X the $.77 quarterly dividend, and gives you a lower breakeven of $240.15, which is 5.23% below AAPL's average price target. The annualized yield is 10.73%.

NOTE: Put sellers don't receive dividends - we only include them in our tables so subscribers can compare them to the put premiums for each trade.


Covered Calls - With no quarterly dividend until the start of February 2020, another way to gain some income on AAPL would be to sell covered calls. This is a more bullish approach than selling cash secured puts below AAPL's price/share.

However, given AAPL's strong performance in 2019, you might see your AAPL shares get called/assigned before 2020, which, if you were lucky enough to have bought them at the December 2018 lows, would trigger a sizable capital gain.

AAPL's January $265.00 call strike pays $6.95, for a static yield of 13.75%:


Taxes:

All three of these trades also have a potential tax deferral advantage. Even though you receive the option premium money in 2019, if these 2020 trades aren't closed in 2019, you won't have to pay taxes on that income until mid-April 2021.

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