Report on Apple Inc. versus Microsoft Inc. for better stock investment
Introduction
Apple Inc. is an international technology firm headquartered at Cupertino in California. The company is tasked with designing, developing as well as selling computer software, electronics in addition to online services (Wu, Wang & Hao, 2020). It is deemed to be one of the big five companies in American, together with Facebook, Google, Microsoft, and Amazon. The hardware products of Apple are iPhone Smartphones, iPad computer tablets, Mac PC, iPod portable media players, Apple smart-watches, wireless AirPods, and HomePod smart speakers. Similarly, the company deals in software like iPadOS, macOS, and watchOS, among others. The online services which are offered by Apple Inc. are iMessage, iCloud, Apple Music, Apple Pay, Apple Card, Apple Store, among other functions (Leonard et al., 2020). The company was founded in the year 1976 by Steve Wozniak, Wayne Ronald, and Steve Jobs. Initially, it was started to make and sell Wozniak computers. Later on, Ronald Wayne sold off his share in 12 days, and the company becomes incorporated like Apple Computers in 1977 (Wu, Wang & Hao, 2020). Henceforth, the company has witnessed tremendous growth in terms of technological development.
Another multinational company is Microsoft Corporation. This headquartered in Redmond, District of Columbia (Jusoh & Ahmad, 2019). The company is developing, manufacturing, licensing, supporting, and selling personal computers, computer software, and electronics with other associated services. In several instances, it is majorly known software products in the line of operating systems are Microsoft Windows, office suite, internet explorer together with edge web browsers. Ideally, the Microsoft hardware work can be seen on touchscreens of the Microsoft Surface, Xbox videos, and game consoles. By the year 2016, Microsoft was voted the most significant software developer in terms of revenue (Jusoh & Ahmad, 2019). Of late, Google is having more income when compared to Microsoft Corporation.
The company was started in the year 1975 by Paul Allen and Bill Gates. It commenced with developing and selling Basic interpreters in support of Altair 8800 (Jusoh & Ahmad, 2019). In the middle of the 1980s, the company rose into dominating the markets of computer operating systems with the MS-DOS. This closely ensued with the Microsoft Windows. Today, Microsoft Corporation has grown into a larger firm with the increased acquisition of other firms like Skype Technologies and even LinkedIn. The report provides insights to choose on the better stock investment between Apple Inc. and Microsoft Corporation, concerning dividend history, price targets, growth, and valuations, among other investment factors.
Results of recent earnings in Apple Inc. and Microsoft Corporation
In 2019, Apple declared its earning outcomes in the third quarter. In this period, the earning per share was $2.18, that shatters the approximated figure by $0.08 (Vyas et al., 2019). However, this was an indication of a decline compared to the results achieved in the previous year by 6.8%. There was an edge in the company’s revenue by 1% higher towards $54 billion. This figure ideally was $ 362 million as compared to what was projected by the analysts. Again, it was the best fiscal year for Apple even though, in some areas, the organization performed excellently as compared to others (Vyas et al., 2019).
The sales of the iPhone went down by 13% to $27 billion through this represented improvements as of the second quarter, which had a decline of 18%. The total sales of iPhones represented 48%, which is the lowest proportion when matched with sales realized in previous fiscal years (Vyas et al., 2019). Irrespective of the decline in the sales of iPhones, the product continues to be the first preference customers are looking forward to purchasing. As indicated by Rothkopf et al. (2020), the customer satisfaction of iPhones stands at 99%. Albeit the iPhone sales might be declining, it continues to be exceptionally famous with the clients who have already acquired it. Through this higher rate of satisfaction, it is possible to note that these clients shall purchase new iPhones in later dates when they are looking for smartphones. Top customer satisfaction act like the company’s approach to reaching new markets. When the revenue of iPhone sales is removed, then the rest of Apple’s proceeds stood at 17% higher. The service delivery revenue reached $11.5 billion, representing a 13% increment as of the past year. The growth was contributed by Music, cloud, and AppleCare services. The revenues for the Apple Store alongside advertisement businesses performed excellently. Ideally, Apple recorded paid subscriptions of 420 million.
There was growth in wearable by 50%. The Organizational Apple watch continues to reach fresh clients. This is because 75% of product customers were purchasing their Apple Watches for the first time. Again, there was an increment in the demand of AirPods. The iPad revenue attained a $ 5 billion mark. For the past three quarters, the iPad has been growing, leading to sales increments of about 15% from the start of 2019. There was a recorded improvement of revenue attained from Mac sales with the double digits as a result of primary growth in demand of MacBook Pro and MacBook Air.
In general, as a result of the iPhone sales, the revenue of Apple products declined by 2% representing $ 43 billion. Again, the rate of exchange in the currency had impacts on the results making the revenue totals to go down with about $1.5 billion (Kazumori, 2020). However, the sales in China currency for one time become positive. Emerging places that had been dragged into the attained results within the current quarter might ultimately be establishing their footing. The sales in China, Brazil, Russia, and India increased upwards by 3% with the current quarter when matched to 25% declination within the quarter of the 2019 fiscal year. Apple is expecting to earn $12 for each share in this 2020 fiscal year (Kazumori, 2020). This would amount to a 1.9% decline as of the past fiscal year 2019.
On the same note, scrutiny of the current earning results of Microsoft Corporation reveals many issues. The company had the earning results released for the fourth quarter of the 2019 fiscal year. Microsoft Corporation amended its earnings attained for every share during that quarter. The estimates stood at5 $1.37 and $ 0.17. This indicated improvements of 21% as of the past results achieved last year. The growth of revenue occurred at 13% to $34 billion, thus beating the approximated figures by the analysts by $921 million (Kazumori, 2020).
There was an increment in the sale of organizational productivity and the division of business processes by 15% ( Kazumori,2020). The cloud services and products from the commercial office improved by 15%. Such growth was escalated by the 32% if the increment within the revenue of 365 office commercial. There was a recorded growth in the LinkedIn revenue by 26% due to the long record of engagement levels. The revenue for intelligent clouds increased by 15%, and there were improvements in server products as well as cloud services by 23%. All these happened as a result of 64% in the Azures revenue increment (Kazumori, 2020).
For the past fiscal year quarters, there has been slow growth in the Azure revenue from 90% in the subsequent quarters. The sales of personal computing moving higher inching 4 percent with the windows OEM going up to 9% as indicated by Bulan and Subramanian (2009). Cloud services sales improved by 13% and surface, contributing to 14%. On the other hand, gaming reduced by 10% as the services of Xbox software, decreasing by 3% ( Bulan & Subramanian, 2009). There was an increment in the total revenue related to clouds by 39% towards $12 billion for the last quarters recorded by Microsoft Corporation. It was the fiscal year of 2019 when Microsoft’s revenue moved upwards by 15 percent in a year to approximately $127 billion. The adjusted earning recorded in every share traded grew by 22%, which saw making per share increasing by $4. In the 2020 fiscal year, Microsoft Corporation anticipates an earning of %5.00 in every stock traded. The forecasted value represents an increment of 5.3% as of the profit realized in last year.
Better Quarter
From the analysis of earning per share, it appears that the current quarter of Microsoft Corporation is robust irrespective of the recorded results on Apple revenues. Sales decline for the iPhone is an issue since this product controls approximately half of Apple’s revenue. The registered growth in other sections,, like wearable and service deliveries, should provide the company’s shareholders with hopes that revenue streams are being diversified. Again, Apple Inc., for the past years, has achieved much in monetizing a large user base. Having mentioned that, there was growth in nearly every business executed by Microsoft Inc. The company continues witnessing higher demands for its cloud computing services. The services of the cloud have taken Microsoft to higher levels. The ability of Microsoft to grow the business is nearing 40%. This is demonstrating how the demand for cloud services is making the ground within the digital world. Suppose one is to select the two firms based on the current results, then Microsoft would be the best choice. This is because the witnessed growth is illustrated across every business operation. On the other hand, iPhone is representing a higher revenue stream for Apple; however, a yearly decline in sales certainly would bring negative impacts into the business. Besides, the earning of the very traded share of Microsoft for the recent fiscal indicate a growing tendency as that of Apple is forecasting a drop
Dividend Analysis
For the past eight years, Apple Inc. has shown a tremendous increment in its dividend. Over the past three years, the company has experienced an increase in its dividend by 11.6%. Again, the company has witnessed arise in its dividend for the past five years by an average of 10.8 percent. Apple Inc. increased its dividend by 5.6% for the shareholder’s payments made on 5th June of 2019 (Jia & Chance, 2019). The rate paid reflected short and medium increments. The stock of Apple Inc. has yielded over 1.5%. By employing the annualized dividend of Apple of $3.08 as well as expected earning per traded share of $11.70, the ratio of payout for Apple stands at 26%. The value is slightly above the average of corporate’s five years 25% ratio. If we utilize the free cash flows, the proportion of payout looks healthier (Ball, Gerakos, Linnainmaa & Nikolaev, 2020). Apple Inc. accumulated $69 billion out of its cash operation in the period of the past four quarters in the 2019 fiscal year. Similarly, the company spent on capital expenditures a total of $10.8 billion for the free cash flow, totaling $ 59 billion. During this time, the company paid a dividend to a tune of $billion, making Apple’s payouts in free cash flow to 25% (Ball, Gerakos, Linnainmaa & Nikolaev, 2020).
From the above figures, it appears that the dividend of Apple is safe and would continue growing. This provided the organization’s extreme ratio on low payouts, free cash flows, or either earnings. In the quarters between dividends and buybacks, the company returned to shareholders $21 billion. Again, Apple Inc. purchased at an average price of $194 over 89 million shares of its stock.
Fig1. A chart of Apple Dividend Trends
Similarly, the dividend of Microsoft Corporation has been raised for the 17 years consecutively. This makes Microsoft be among the longest growing streaks within the sector of information technology. Again, it makes Microsoft qualify to become the best dividend contender. Over the three years, the company increased its dividend payouts by 10.2 percent. Yet, over the past five years, Microsoft Corporation increased its dividend by 12.2 percent, and in the last ten years, there has been a 14.2 % increment in the company’s dividend. In the fiscal year of 2018, the dividend payment of Microsoft stood at 9.5 percent. This increment was below the highest actual amounts to happen for Apple. Currently, the shares of this organization yielded 1.35%. In this fiscal year 2020, Microsoft is anticipated to pay out $1.84 for every traded dividend. If we employ the adjusted earning in a year for each share of $5.00, then the payout ratio of Microsoft is expected to stand at 37 percent as compared to an approximated payout ratio within five years, which holds 46% ( Ball, Gerakos, Linnainmaa & Nikolaev, 2020)). Just like Apple, Microsoft is generating high free cash flow levels. From the firm’s operation in 2019, Microsoft made in cash over $53 billion, with $14 billion being used in capital expenditures (Ball, Gerakos, Linnainmaa & Nikolaev, 2020). Over the last quarter of the 2019 fiscal year, Microsoft paid out $13.9 billion in terms of dividends. Again, the company managed to return to shareholders approximately $ 8 billion within the four quarters of the fiscal year 2019 between the buyback and dividend.
Fig 2. A chart of Microsoft Dividend Trends
Dividend History
Overall, Microsoft and Apple have returned substantial capital to the shareholder of these firms via dividends and buybacks. Also, the two firms incredibly have low ratios of payout when they used free cash flows or earning per share traded. The yield for every stock is the same as well as below 1.9 percent, which is the standard return in support of any S&P 500 Index. The buyback of Apple’s share is incomparable with any other firm. It is lower as compared to the stock dividend. If an increment occurs, then the company would be aiming at keeping the payout ratios next to its historical standard. The bonus of Microsoft was the same as its historical standard, as well as the payout ratios. However, such ratios were higher when compared to those of Apple Inc. Microsoft Corporation similarly had a more prolonged growth streak in its dividends. This category is rated as a tie between the two firms. This is because both Microsoft and Apple are equivalent in terms of their profits. The two stocks are having the same yield with low ratios of payouts. Microsoft registered longer streak growth in its dividend. The cash generation of Apple shows that the firm would be able to continue reimbursing and growing its profits in the future. It is imperative to note that growth investors on dividends can never go wrong on investing in either organization.
Valuation and Price Targets
In terms of financial strengths value line offers Apple an A++ and a 2 in support of safety. The two ratings make stock eligible for purchase (Vasilaki & Tsakalidis, 2019). If we use the price of a closing share in the 2019 fiscal year, which was at $220.7, then the midpoint earning of the company stands at $11.7. Apple shares were being traded at a P/E ratio of 18.9 (Vasilaki, M., & Tsakalidis Jr, G. (2019). Essentially, this is a 24% premium when compared to the stock in the past five years, which averages at P/E of 14. The price target, as indicated by CFRA, was $240, proving 8.8% upside as of the present levels. The estimate of CFRA, which can be viewed as a fair value stands at $216. This means that shares are trading at 2.5 percent premiums towards their appropriate costs. These values show that Apple is having less than a decade of growth in its dividend. So, one would need to stock to trade at fair value approximations before buying. A price below $208 would be best for one buying Apple shares.
Again with the Microsoft Corporation, for the financial strength, the value line offer A++ for the power and 1 in favor of safety. These are the highest values ever provided by the value lines. By using the present price of share traded at $137.40, the midpoint earnings of the 2020 fiscal year at $5.00, Microsoft shares are trading the P/E ratio of 28. The value is 27 percent premium to the stock of the past average attained in five years, which was P/E of 21. Checking on the CFRA ratings on the stock price target stands are $178. This is proving a 29% upside as of the present price. The fair value approximation, as outlined by CFRA, stands at $116 shows that today the shares of Microsoft are overvalued by 16%. However, since it is having a decade in its growth in dividend, paying 5 percent above fair to get the share is a wiser decision.
Conclusion
In my opinion, Microsoft Corporation comes top between the two firms. Because in the last quarter, Microsoft exhibited growth in crucial areas indicating the firm’s products are in higher demand. Despite robust rates of growth in particular categories of products, Apple recorded a decline in sales for its key revenue contributor. In terms of dividend growth, the two firms are equivalent. Some investors look into longer streak growth witnessed in Microsoft Corporation though some payout proportions for Apple are incredibly low. As the two firms are, to some extent, overvalued today, in my investment rules, Microsoft can be bought. Apple cannot. Upon assessing the current results on quarterly earnings, histories of dividends, price targets, and valuations of the two companies, Microsoft Corporation is the best option for one to invest in between the two giants in technology.
References
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Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2020). Earnings, retained earnings, and book-to-market in the cross-section of expected returns. Journal of Financial Economics, 135(1), 231-254.