Apple Inc. (AAPL)vs Bank of America Corporation (BAC)

Quick verdict

Comparing a consumer electronics business with a diversified bank requires ignoring several of the metrics on this page, because bank balance sheets do not translate into the ratios used for industrial companies. Setting those aside, the picture is clear enough. Bank of America trades at 14.62 times trailing earnings against Apple's 34.92, and yields 1.74% against 0.35%. Apple earns a 27.62% net margin against 18.95% and a far higher return on capital. Our framework scores Apple 3.5 and Bank of America 2.5, giving Apple growth, quality and the balance sheet, and Bank of America valuation and income. Apple is the better business; Bank of America is the cheaper stock.

2-year relative performance

At-a-glance comparison

Business model and revenue mix

Bank of America sits in Financial Services as a diversified bank; Apple in Technology as a consumer electronics manufacturer. The distinction matters more than usual because several ratios shown elsewhere on this page are not meaningful for a bank. Leverage, current ratio and return on invested capital all assume a company that borrows to fund operations, whereas a bank's borrowing is its raw material. We have not drawn conclusions from those figures for Bank of America here. What does compare cleanly is profitability per dollar of revenue and the price paid for it. Bank of America's beta of 1.17 sits close to Apple's 1.09, so despite the very different businesses, the two have not moved dramatically differently.

Valuation

Bank of America is much the cheaper stock. It trades at 14.62 times trailing earnings against Apple's 34.92, 2.58 times sales against 9.63, and 1.53 times book against Apple's 41.81. Price-to-book is the multiple that matters most for a bank, since book value approximates the capital actually at work, and 1.53 times is a modest premium to that capital. Apple's 41.81 reflects an equity base shrunk by buybacks rather than any statement about asset quality, so the two figures should not be read side by side. On PEG, Bank of America's 0.53 against Apple's 1.07 also favours the bank. Its free-cash-flow yield of 20.7% is not comparable to Apple's on a like-for-like basis.

Growth profile

Apple takes the growth factor, though neither company is expanding quickly. Apple's revenue has compounded at 6.43% over three years while Bank of America's has contracted at 0.45%, essentially flat. On earnings the bank has done better: EPS compounded at 19.38% against Apple's 22.59%, a narrower gap than the revenue figures suggest. For a bank, earnings growth in this range typically reflects the interest rate environment and credit costs as much as it does business expansion, so it is less repeatable than growth driven by rising volumes. Apple's mid single digit revenue growth is unspectacular but is at least coming from the top line, which makes it the more durable of the two.

Profitability and quality

Apple wins this factor. Its 27.62% net margin exceeds Bank of America's 18.95%, and its 33.17% operating margin exceeds the bank's 24.7%. Apple's return on invested capital of 51.87% is not comparable to a bank's, so the cleaner profitability comparison is return on equity: 137.18% for Apple against 11.13% for Bank of America. Even discounting Apple's figure heavily for its buyback-shrunken equity base, the gap remains wide. An 11.13% return on equity is respectable for a large diversified bank and roughly in line with what the sector produces through a normal cycle, but it does not compete with a business that enjoys genuine pricing power over its products.

Balance-sheet risk

Our framework awards this factor to Apple, but the comparison deserves a caveat rather than a verdict. Bank of America's leverage and liquidity ratios look alarming when read with industrial-company assumptions, because a bank funds itself with deposits and borrowings by design; those are inputs to its business, not signs of distress. Applying the same thresholds used for Apple would be misleading, so we have not done so. What can be said is that Apple's position is straightforward: net debt at 0.27 times EBITDA and a current ratio of 1.00, comfortably supported by continuous cash generation. Assessing a bank's financial strength properly requires capital adequacy ratios that our data provider does not supply.

Price performance and shareholder returns

Bank of America has been the better holding over both windows we can measure. It returned 36.52% over the past year against Apple's 31.11%, and 27.85% annualised over three years against 19.74%. Year to date it leads 15.26% against 12.89%. That performance came with more downside history: a 49.03% worst five-year drawdown against Apple's 33.43%, reflecting how banks trade during credit stress. On income Bank of America pays 1.74% against Apple's 0.35%, on a 29.02% payout ratio against Apple's 12.13%. Neither is a high yielder, but the bank returns roughly five times as much and retains a smaller share of earnings. Past performance never guarantees future results.

Which stock fits which investor

Value investors should favour Bank of America, at 14.62 times earnings and 1.53 times book against Apple's 34.92 and 41.81. Income investors will also prefer the bank, whose 1.74% yield is roughly five times Apple's 0.35%, though neither would satisfy a genuine income mandate. Growth investors should lean toward Apple, the only one of the two with positive revenue growth. Quality-focused investors will favour Apple on margins and returns on capital. The broader point is that these two stocks serve different portfolio functions: Apple is a concentrated bet on consumer technology, Bank of America a leveraged bet on credit conditions and interest rates. Owning both diversifies more than owning either twice.

• Value: BAC
• Growth: AAPL
• Income: BAC
• Quality: AAPL

Frequently asked questions

Is Apple or Bank of America the better buy right now?

Apple scores 3.5 on our six-factor framework and Bank of America 2.5. Apple wins growth, quality and the balance-sheet factor; Bank of America wins valuation and income. Apple is the more profitable business; Bank of America is considerably cheaper.

Which stock is cheaper, AAPL or BAC?

Bank of America, substantially. It trades at 14.62 times trailing earnings against Apple's 34.92 and 1.53 times book against 41.81. For a bank, price-to-book is the more meaningful measure, and 1.53 times is a modest premium to the capital actually at work.

Which pays the better dividend?

Bank of America, at 1.74% against Apple's 0.35% — roughly five times as much. Its payout ratio is 29.02% against Apple's 12.13%, so it returns a larger share of earnings while still retaining most of them.

Why are some ratios not comparable between a bank and Apple?

Leverage, current ratio and return on invested capital assume a company that borrows to fund operations. For a bank, borrowing is the raw material of the business, so those ratios do not carry the same meaning. We have avoided drawing conclusions from them for Bank of America on this page.

Which has performed better recently?

Bank of America. It returned 36.52% over the past year against Apple's 31.11% and 27.85% annualised over three years against 19.74%. It has also been more volatile historically, with a 49.03% worst five-year drawdown against Apple's 33.43%.

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