Although John Sculley (thePepsi CEO that left the helm at Steve Jobs’ behest only to sack him later after disagreeing about the future of the company—Jobs wanted to focus on lowering the price and increasing the advertising of the Mac, and Sculley thought the Mac was structurally deficient due to already obsolete technology) did an interview way back in September with Forbes to discuss the most famous firing of our generation, I didn’t see it until today.
When finance writers bring up the Jobs/Sculley relationship and talk about Apple’s meteoric success as an investment, there are two things that they usually miss.
First off, they usually ignore the fact that John Sculley utterly failed in his role to bring cash flow to Apple. The problem with Apple’s stock (up until this past decade) is that the company was always a cash-starved business that generated a lot of sales but didn’t create the much-needed pricing gap that leads to cash flow.
The point of Sculley joining the show at Apple was to be the much hated bean-counter that tempers the dreams of the visionaries by generating profits now. The thing is, he did neither. In other words, he got rid of the visionary guy, but didn’t actually make things profitable because the company was still generating 20x as much in sales as it was in cash flow. Old Apple disclosure reports show things like “$14.32” per share in sales and “$0.38” in cash flow per share the years after Sculley got rid of Jobs.
Even with Jobs back, Apple didn’t become functional as a cash-generating business until the 2005-2008 stretch. By the time 2008 came around, Apple was making $36 per share in sales and generating over $5 in cash flow. That rate of turning $7 in sales into $1 of cash flow is usually something that a ruthless, cost-cutting businessman with a bit of Rockefeller blood in his DNA would do, and I think it’s a great underreported historical irony that Steve Jobs’ second run at the helm ended up resulting in the kind of “businessmanlike” results that Apple’s Board wanted when bringing on Sculley initially.
The second lesson, related to this, is that Apple didn’t really exhibit the signs of being a blue-chip quality stock until the mid-2000s. That’s why I tend to shrug my shoulders when I get e-mails from readers asking about Apple stock. It wasn’t until about 2006 or so that Apple started showing signs that it was generating profits that could actually be removed from the business (rather than cash that had to be constantly plugged back into Apple’s R&D division to grow the company).
I think one of the big sources of misguided energy among many investors is that they are always looking for the next Apple, Netflix, Tesla, or whatever. That’s all you hear about on CNBC. The appeal is understandable: Since June of 2000, Apple has been just about the best thing you could buy, compounding at 26% annually. A $25,000 investment would have grown into $598,000.
What I find interesting, though, is that you can get those kind of results in a near-guaranteed way if you are willing to stretch out your time horizon. Take something like General Mills. No one ever talks about. If you went on CNBC and recommended it, they’d quickly cut to a commercial and politely usher you off the set (and if you hold your breath waiting for the next invite back, you’d be liable to suffocate). It bores the heck out of everyone. The stock just seems to kind of sit there around $50, exciting no one.
There’s just one thing special about it: General Mills pounds out profit every day of every year for over the past 125 years.
Flour, cereal, and yogurt are things that General Mills has always been able to sell in a way that produces impressive cash flow. The product is as basic as can be, and that is why the company’s dividend has never gone down despite two World Wars, inventions of air conditioning, television, cell phones, and the internet. Heck, the Wright Brothers were trying to fly a plane for the first time and General Mills’ dividend still predates that technological shift.
Betting on people to keep eating cereal and use flour is about the closest thing to a sure bet you could find. Since 1988, a $25,000 investment in General Mills would have turned into $663,000. You’d be collecting $21,000 in dividends, inching closer to that hallowed point where you’d be collecting more in cash per year than you actually originally in the company to begin with. It’s the ultimate case of “house money.”
Even though it seems easy now, if you could go back in time, it would be quite difficult to tell the difference between Apple, and say, AOL, WebTV, Polaroid, CUSeeMe, Kozmo.com, Napster, Wang Laboratories, AltaVista, The 3DO Company, Appeal, Aureal Semiconductor, Silicon Graphics, Fairchild Semiconductor, Magnavox, Atari, Zenith Electronics, Palm Computing, Sega, Sun Microsystems, and Commodore International.
But the person who could wait the additional twelve years for similar results actually ended up accomplishing his success in a much more high probability way. We all that, absent a 2008-2009, 1973, 2001, or other situation, General Mills shareholders will at least double their money in the next ten years. More likely, it will take about seven years if the markets are rationally valued at that time.
Yet, the financial media also focuses on the stock that is going to double within the next two or three years. Add a couple years to your time horizon, and you can invest in such a way that your probabilities of success shift from “throwing at a dartboard” to “near certainty.”
I often call this “shiny object syndrome.” There’s also something higher yield, or growing faster, that seems to catch people’s attention and dominate the conversations. But if you are willing to work with that 2-4% dividend yield sweet spot, and focus on businesses that have an extreme tendency to grow in the 8-12% range, then you can actually engage in the art of investing rather than speculation and remove the odds of getting burned. If you shift your focus to improving your savings rate and expanding your time horizon, you can increase your probabilities of success in a substantial way.
Apple is the best-case scenario for investments over the past fourteen years. There’s what, a 0.5% chance of someone predicting Apple’s future trajectory back in 2000? Yet, General Mill’s success from 1988 through 2014 is par for the course for a company of its quality. Instead of criticizing it as boring, we should call it “Apple + 12 Years.”
Originally posted 2014-04-05 23:04:18.
Reading between the lines, are you tacitly saying that Apple is now a blue chip dividend stock?
innerscorecard The difficulty with saying that is the following: Apple’s phone sales ten, fifteen, twenty years from now is hard to predict. Phones are notoriously fickle, and market leaders can collapse in spectacular fashion rapidly (talk to long-term Blackberry shareholders for an eye-witness account). Hershey, on the other hand, will continue pounding out chocolate-y profits for its owners ten, fifteen, twenty years from now. It’s a much easier bet to make.
In terms of corporate financials, though, Apple started looking like a blue-chip stock around 2005 or 2006. Whether it will continue to be high-quality, I think, depends entirely on innovation in the phone sector to maintain its place. Do you have faith in Apple to compete?
Just picked up 137 shares of GIS on Friday. I wanted to make sure I captured the May 1 dividend. At 18.7 times earnings and yielding 3.2%, it is fairly reasonably priced on a relative basis. This blurb from the GIS investor relations department pretty much sums it up “This is 15th time in the past 10 consecutive years that General Mills has increased its quarterly dividend rate. Furthermore, this is the 115th year General Mills and its predecessor firm, the Washburn Crosby Company, have paid dividends without interruption or reduction.”
Coleman Jr Bingo! You get it, Coleman.
TimMcAleenan innerscorecard I think that’s the central question about Apple. Is it an innovation machine that has a process that churns out hits (like a pharmaceutical company), or is it just a device manufacturer that got lucky? I think the evidence so far points to the former (at least since 2005, it has consistently made money in not just the competitive phone market, but also the declining computer market), but reasonable minds disagree. I think given this uncertainty AAPL is priced reasonably. In any case, I think the uncertainty will be settled when new product categories (the last earnings call literally says they are coming) this year come out.
I definitely agree with the thesis of this article, however. AAPL isn’t an investment that will let you sleep as well at night as the other companies you mention. I do think AAPL last year provided a reasonable margin of safety. The dividend should grow again later this month as well (at the very least because the fixed authorized dividend amount to be distributed will now be distributed among a much smaller amount of shares).
Apple’s history is too short, and is rise to be a true powerhouse last 5-10 years is too short. I personally prefer companies that have been around for longer (even tech companies or being held as a private company over long periods of time before going IPO).
Coleman Jr
I don’t own any GIS, but I do invest in other companies that are closely related to GIS. Really, GIS (and its peers) does not have to deal with sudden technological shocks. Apple may be a one-time-glory with its iPhone (I do own one – I will admit their quality is quite nice and they are durable); GIS, Kraft, Hershey, Hormel, Unilever, Nestle’s food products are sold today, and their products will still be selling for a foreseeable future (possibly the only uncertainty can exist is spin-offs or getting acquired by another company).
This is interesting. I just watched the ‘Ashton Kutcher’ Jobs movie. What I got from it was that Jobs was a dick. He was able to choose the right people to do his ideas, which is I guess what you need but it seemed like he rode other peoples accomplishments and then treated them like sh!t.
That’s it. No comment on APPL stock. But I am long GIS 😉