Image Shown: Inside an Apple store. Source: Valuentum

By Brian Nelson, CFA

The core of stock valuation centers on two cash-based drivers: the net cash a company has on its balance sheet and the enterprise free cash flows that it will generate in the future, discounted back to today at a reasonable discount rate. After subtracting the value of other components of the capital structure such as preferred stock or debt from the sum of net cash and the present value of future enterprise free cash flows and dividing by total diluted shares outstanding, the result is called a fair value estimate. The fair value estimate is then compared to the stock price to determine if shares are undervalued or overvalued.

Apple (AAPL) is one of many big cap tech equities that has substantial valuation support for its equity price. On April 28, Apple reported excellent fiscal 2021 second quarter results for the period ending March 27, 2021. Revenue advanced 54% year-over-year, while earnings per diluted share came in at $1.40, which more than doubled from the year-ago period. Operating cash flow surged to $62.7 billion during the first six months of the fiscal year, up from $43.8 billion during the same period a year ago, while traditional free cash flow leapt to $57 billion, up from $39.9 billion in the same period in fiscal 2020. Apple is one of the strongest free cash flow generators in our coverage universe, and it has a fortress-like balance sheet The company ended the March 2021 quarter with total cash equivalents of $204.4 billion and net cash of $87.7 billion.

Apple is simply a financial powerhouse.

Video shown: Valuentum's President Brian Nelson walks through Apple's financial statements to explain the cash-based sources of intrinsic value and how net cash on the balance sheet and future expected free cash flow are key sources of dividend health. This 10-minute video clip is part of a 3+ hour presentation on financial statement analysis provided in April 2021.

Here’s what CEO Tim Cook had to say about the quarter in the press release:

We are proud of our March quarter performance, which included revenue records in each of our geographic segments and strong double-digit growth in each of our product categories, driving our installed base of active devices to an all-time high. These results allowed us to generate operating cash flow of $24 billion and return nearly $23 billion to shareholders during the quarter. We are confident in our future and continue to make significant investments to support our long-term plans and enrich our customers’ lives.

Apple also upped its dividend payout 7% to $0.22 on a quarterly basis, or $0.88 per share annualized, which reflects a forward estimated yield of just shy of 0.7%. Though this is not as high as we would like, we believe Apple has tremendous financial capacity to raise its dividend in a big way should it choose to scale back share buybacks, which absorbed ~$43.3 billion in cash during the first six months of fiscal 2021 alone. For comparison, the company paid ~$7.1 billion in cash dividends over the same period. The iPhone maker has considerable financial flexibility.

Concluding Thoughts

We expect to make a few tweaks to our valuation model of Apple following the earnings report, but the company is a mainstay as an idea in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. We’re excited about future iterations of Apple’s product line-up and its huge installed base of loyal active users that carve out an economic moat for the firm. The high end of our fair value estimate range is north of $160 per share, and we fully expect Apple to retain one of the strongest Dividend Cushion ratios in our coverage, even after its prudent and conservative 7% dividend hike. Buybacks will continue at a torrid pace, and we have no qualms with that.

Tickerized for AAPL, SWKS, CRUS, QRVO, AVGO, QCOM, LITE, JBL, SITM, XLK

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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, and IWM. Brian Nelson's household owns shares in HON, DIS, HAS. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.