project analysis part 2 apple inc aapl

Required Rate of Return .3 IT, Using Constant Growth Model to estimate the Stock PFICG...... Required Rate of Return We calculated PO as: where: : Stock price at the beginning g: Constan

PROJECT ANALYSIS

Part 2

Apple Inc (AAPL)

Class: Business Analysis 61

Team members:

Dang Thu Huong

Tran Tam Anh

Lé Chi Thanh

Nguyễn Thị Thơm

Phạm Hồng Hạnh

Nguyễn Huyền Chi

Hoàng Minh Thuy

Phạm Hà Tường Vy

Bùi Ngọc Minh Châu

Table of Contents

Ls Estimating A Required Rate of Returny iccccsccscssccsccssssescssnsnsccsensenssnaesenens 2

LL, —_ Dividend Growth Rate ceccccsscsscesssnssensensssacensssassnssnsssnssnasssnasssnasconaseeeaes 2

12 Required Rate of Return 3

IT, Using Constant Growth Model to estimate the Stock PFICG << 4

21 Definition of Constant Growth Model 4 2.2 Applying to Apple to estimate Stock PHÍCC cong ve 5

HE, Using Nonconstant Growth Medel to estimate the Stock Price 6 3.1, Definition of Nonconstant Growth MĨO(GÏ Go HỲS.Ỳhse, 6 3.2 Applying to Apple to estimate the Stock Price rrcccsssicsersessesscsesseseessrsenes 7

TỪ Using PE ratio of benchmarking firms to estimate the Stock Price 10 4.1, Definition of Multiple ÁDDTOQCÌLCS HH HH Ý hy 10 4.2 Choosing BeHChữmtrk PT TÍÍO co c tt gà 10

Kk Comparing Estimated Prices to aH ActHdl Mlarket PFIC€ «<«< 13 3.1 The relationship of DDÏ€ WI(H (HC HHAFÌCÍ co HH khe gan 14 5.2 CormpDqH SD€CIfTC CHP(CÍCTISÍÍCN HH HH TH ng Y tk hy 15 3.3 Behavioradl pattern, or DeliqViordl (ÏH(HCC uc con nh Y key 16 ƯAN .7nn 16

Apple has been likened to a magnet to attract investors for many years, especially experienced investors like Warrent Buffet with 43% of capital in Apple shares However, whether or not to buy Apple stock in 2021 is still concern of many world investors Warrent Buffet once told CNBC in February 2020: “ I don’t think of Apple as a stock I see Apple as our third business.” This quotes proves how highly Warrent Buffet appreciates Apple So, what are the reasons why Apple is considered a “must-have” investment in the portfolio of stock investors?

L Estimating A Required Rate of Return

11 Dividend Growth Rate

The dividend growth rate is the annualized percentage rate of growth that a particular stock's dividend undergoes over a period of time Many mature companies seek

to increase the dividends paid to their investors on a regular basis Knowing the dividend growth rate 1s a key input for stock valuation models known as dividend discount models Apple’s dividends per share paid to the company's shareholders for the past 5

years are:

Year Dividends per share

2016 $0.5575

2017 $0.615

2018 $0.705

2019 $0.76

2020 $0.8075

To calculate growth from year from year to year, use the following formula:

In this case, the Growth rate is:

+ Growth rate Year 2016 =N/A

+ Growth rate year 2017 = $0.615 / $0.5575 - 1 = 10.31%

+ Growth rate year 2018 = $0.705 / $0.615 - 1 = 14.63%

+ Growth rate year 2019 = $0.76 / $0.705 - 1 =7.8%

+ Growth rate year 2020 = $0.8075 / 0.76 - 1 =6.25%

Therefore, the average annual growth rate (g) is 9.7%

As a consequence,

12 Required Rate of Return

We calculated PO as:

where:

: Stock price at the beginning

g: Constant growth rate expected for dividends in perpetuity

R: Rate ofreturn

: Value of dividends year 1

If we rearrange this to solve for R, we get:

The first of these, , is called the dividend yield Because this is calculated as the expected cash divided by the current price, it is conceptually similar to the current yield

on a bond

We observe a stock selling for $124.61 per share at 28/05/2021 The next dividend will be $0.88 per share The dividend growth model calculates total return as:

This stock has an expected the Required return of 10.41 percent

We can verify this answer by calculating the price in one year, Pl, using 10.41 percent as the required return Based on the dividend growth model, this price is:

Notice that this $135.96 is $124.61 x 1.091, so the stock price has grown by nearly

1.097%, as it should If we pay $124.61 for the stock today, we will get a $0.88 dividend

at the end of the year and will have a $11.35 gain Our dividend yield is thus 0.71% Our capital gains yield is $11.35/124.6, so our total return is approximately 10.41%

While most businesses suspend stock buybacks, cut dividends, Apple goes in the opposite direction Annual dividend payment rate is about 2%/year In addition, Apple is also the company with the highest return on the US stock market, with an average annual ROE of more than 73%, which means that every $10 invested in equity will earn a profit

of about $7.3

I Using Constant Growth Model to estimate the Stock Price

1 Definition of Constant Growth Model

The Constant Growth Model values a company's stock using an assumption of constant growth in payments a company makes to its common equity shareholders The three key inputs in the model are dividends per share (DPS), the growth rate in dividends per share, and the required rate of return (RoR)

The Constant Growth Model focuses strictly on the effect of future dividends ignoring other factors that affect the market price of stock such as new product, competitors and investor sentiment

We can actually use the constant growth model to get the stock price at any point

in time, not just today In general, the price of the stock as of time t is:

where:

: Current stock price

g: Constant growth rate expected for dividends in perpetuity

R: Constant cost of equity capital for the company (or rate of return)

: Current value of dividends

Value of next year’s dividends

Suppose we know that the dividend for some company always grows at a steady rate If we let be the dividend just paid, then the next dividend, , is:

= (1+g)

1.2 Applying to Apple to estimate Stock Price

Assume that at the end of 2021 the Apple corporation will pay a dividend of 0.88 per share Its stock has a required rate of return of 10.41% and investors expect the dividend to grow at 9.7 % in future

Year End Expected Dividends

2021 0.88

2022 0.97

2023 1.06

2024 1.16

Therefore, we have:

Hence, Apple's stock is valued at $123.94/share in the Constant growth model Following the above function of current stock price, we have:

These results illustrate that the constant growth model makes the implicit assumption that the stock price will grow at the same constant rate as the dividend This really isn’t too surprising What it tells us is that if the cash flows on an investment grow

at a constant rate through time, so does the value of that investment

GGM assumes a company exists forever and pays dividends per share that mcrease at a constant rate This is the main limitation of the Gordon growth model It 1s very rare for companies to show constant growth in their dividends due to business cycles and unexpected financial difficulties or successes

Year Dividends per share

2016 $0.5575

2017 $0.615

2018 $0.705

2019 $0.76

2020 $0.8075

Apple's dividend payment has been increasing over the years but not in a constant rate The model is thus limited to firms showing stable growth rates

Ill Using Nonconstant Growth Model to estimate the Stock Price

LI, Definition of Nonconstant Growth Model

Nonconstant growth models assume the value will fluctuate over time and it displays unusually rapid growth for an extended period—a year or longer Any number of factors may set off unusually rapid growth in a security: launching an exciting new product or technology; creating an innovative business model or marketing strategy; or mitiating a much-needed service

H1.2 Applying to Apple to estimate the Stock Price

To avoid the problem of having to forecast and discount an infinite number of dividends, we will assume that the dividends will grow nonconstantly from 2021 to at the end of 2023 and start growing at a constant rate in 2024

From the results above, after the third year, the dividend will grow at a constant rate of 9.7 percent per year The required return is 10.41 percent

The expected dividend of Apple in the future is predicted following the three arguments below Firstly, according to the report from Dividend Max, the expected

dividend of Apple in 2022, 2023, 2024 is $0.92, $1.02, $1.13 respectively Secondly,

those predicted numbers are calculated based on the annual growth rate of dividends per share

From researching, the dividend per share in 2018, 2019, 2020 is $0.73, $0.77 and

$0.82 respectively It means the dividend price per share in 2019 has increased by 5.47 per cent from 2018, and that index in 2020 has increased by 6.49 per cent from 2019 As can be seen, this growth rate has gone up by 18.647 percent from 2019 to 2020, so we applied this number for the next 4 years and the results is displayed in the below figure:

Year | Dividend price per share | The growth rate | The increase of the growth rate

2021 $0.88 7.7% 18.647%

2022 $0.96 9.136% 18.647%

2023 $1.06 10.84% 18.647%

2024 $1.19 12.86% 18.647%

In this section, we study the development potential of recent Apple's report

In October 2020, Apple announced financial results for its fiscal 2020 fourth quarter ended September 26, 2020 The Company posted record September quarter revenue of $64.7 billion and quarterly earnings per diluted share of $0.73 International sales accounted for 59 percent of the quarter’s revenue

8

Apple's second-quarter financial report also shows that while iPhone sales have continued to decline, the Apple Watch and AirPods have become increasingly important

to the company's business Business Insider assesses that they will likely replace many of the products that Apple sold before Apple's wearables and accessories business (including the Apple Watch and AirPods) has surpassed the iPad business and is gradually catching up with the Mac According to the report, they accounted for $5.5 billion in sales, while iPads and Macs made $5 billion and $5.8 billion, respectively According to Counterpoint Research, as of the fourth quarter of 2018, Apple controlled 60% of the true wireless headset market "They are driven by increasing user demand.In addition, the AiPods 2 generation with some improvements Advances in sound quality and wireless charging also help increase the appeal of the product," said Business Insider According

to an estimate by TF International Securities in December 2018, Apple shipped about 26-

28 million AirPods This number may increase to 50-55 million units in 2019

AirPods aren't the only product that's helped Apple grow in its wearables business Apple Watch also plays an important role thanks to its price According to Strategy Analytics, by the fourth quarter of 2018, Apple Watch accounted for 51% of the global smartwatch market

However, what makes the AirPods special is that like the iPhone, it has become an icon Right from the time of its launch in 2016, this headset has received mixed reviews from design to price This made it quickly become a meme and used by many users Apple will probably never achieve a hit as big and impactful as the iPhone However, with AirPods, the company has shown the attraction of a fledgling product that can still dominate the market

Besides, China is one of Apple's biggest markets and where iPhones are assembled The mass closure of factories here during the Covid-19 outbreak in China has caused a global shortage of iPhones Although Apple has now reopened stores in China, all other retail locations around the world are closed indefinitely, causing iPhone sales to drop Some new iPhone products have had to delay their launch on the market or change 9

the way they were launched, not as popular as before due to the social distancing requirements of some countries Despite significant success in the wearables and accessories business, the fact that consumers are becoming more cautious in spending during this period has caused Apple's total revenue to grow quite slowly In general, Apple is developing gradually but not really explosively

From three main arguments, we have supposed that the following average dividend forecasts for the next three years may closely resembled with those numbers in the table below:

Year Expected Dividend

2022 $0.94

2023 $ 1.04

2024 $ 1.16

Nonconstant growth Constant growth

| | | | | | |

I | | I | |

Time 2021 2022 2023 2024 2025 2026

P3 = = $179,228

The total value of the stock as the present value of the first three dividends plus the present value of the price at Time 3 (2024), P3

10

So Apple's stock is valued at $135.728/share with the nonconstant growth model

IV Using PE ratio of benchmarking firms to estimate the Stock Price

IVI Definition of Multiple Approaches

A common approach 1s to make use of the PE ratio to its earnings per share (EPS) over the previous year The idea here is to have some sort of benchmark or reference PE ratio, which we then multiply by earnings to come up with a price:

12 Choosing Benchmark PE ratio

The benchmark PE ratio could come from one of several possible sources It could

be based on similar companies (perhaps an industry average or median), or it could be based on a company’s own historical values

In the case of Apple, we choose is the average PE for trailing 12 months (TTM) by Apple and 4 other competitive companies: Samsung, Xiaomi, Sony, LG

Apple Samsung | Xiaomi Sony LG Average

PE Ratio (TTM) 28.01 19.23 22.8 11.67 14.78 19.298

Therefore, the Benchmark PE ratio is 19,298

We choose this Benchmark PE Ratio for three following reasons

Firstly, Apple is a top capitalization company in the Consumer Electronics industry, we choose 4 largest companies in this industry to ensure technological, customer network, scale, and capital structure similarities

Samsung Electronics is the world's largest manufacturer of mobile phones and smartphones in 2016 according to The Guardian The company is also a major vendor of tablet computers, the world's largest television manufacturer since 2006, and the world's largest memory chip manufacturer From 2017 to 2018, it had been the largest semiconductor company in the world, briefly dethroning Intel, the decades-long

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