A Brief History of Apple's Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.

  2. Earnings growth.

  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Apple (NAS: AAPL) .

Apple shares have returned 4,843% over the past decade. How did it get there?

The company (famously) pays no dividend, so that isn't a factor.

Earnings growth over this period has, unsurprisingly, been astounding. Between 2002 (earnings weren't positive in 2001) and today, Apple's earnings per share have grown at an average annual rate of more than 75% a year. That isn't an anomaly of the calendar: Narrowing the time frame down to the past five years, EPS growth still averages more than 60% a year. Over the past three years, it's still 55% a year.

But shareholders may actually be justified to feel a little gypped. That's because as Apple's earnings have steadily surged, the amount the market is willing to pay for those earnings has steadily dropped:


Source: S&P Capital IQ.

The big P/E-ratio spike circa 2003 was due to a temporary dearth of earnings, not market overexcitement. But if you look at what has happened to Apple's earnings multiple over the past four or five years -- a period during which its dominance and earnings power have grown greater by the quarter -- the ratio has inched consistently lower. If Apple commanded the same P/E ratio today as it did in 2006, it would be a $700 or $800 stock, compared with today's current price of around $400.

Other big tech companies such as Google (NAS: GOOG) and Microsoft (NAS: MSFT) have been dealt a similar hand. What explains it? There are all kinds of theories, ranging from the idea that the market discounts the large cash balances these companies hold on their balance sheets, to the idea that the market doesn't have a big appetite for companies that don't pay dividends, to the "Who cares? Shares are cheap!" value crowd. Regardless of the reason, Apple's P/E ratio has been on a steady decline.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but also where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time thisarticle was published Fool contributorMorgan Houselowns shares of Microsoft. Follow him on Twitter, where he goes by@TMFHousel. The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Microsoft, and Apple, as well as creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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