Apple has turned into a fantastic investment for Buffett’s Berkshire Hathaway.
It’s not a surprise that most investors closely follow Warren Buffett. Based on his track record managing Berkshire Hathaway, he’s arguably the greatest capital allocator ever.
The Oracle of Omaha has owned many stocks over the years, but none has moved the needle quite like Apple (AAPL -0.35%). Berkshire first purchased shares in the first quarter of 2016. From the start of that year to right now, the “Magnificent Seven” stock has skyrocketed 527% (as of April 19). It makes up 41% of the conglomerate’s portfolio.
Apple’s market cap is a whopping $2.6 trillion, and after such a remarkable performance, shares trade at a price-to-earnings ratio of 25.7. This makes you wonder why Buffett still owns shares.
After giving it some thought, I believe there are four reasons why.
Forever stock
The first possible reason that Buffett remains a shareholder is because his favorable holding period is forever. He hasn’t even owned Apple stock for a decade yet, but this dominant business possesses traits that could make it a forever stock.
It has arguably the strongest brand on Earth, so it benefits from pricing power, with consumers willing to pay expensive prices for its hardware devices. The combination of its products with services creates an incredibly powerful ecosystem. And Apple produces insane amounts of free cash flow.
Because Berkshire isn’t selling off a sizable chunk of its shares, Buffett can be sure that his firm isn’t left paying a huge tax bill. This way, compounding can continue working its magic.
High returns
Another less obvious reason Buffett is still an Apple investor is simple because he believes the stock is going to continue generating market-beating returns over the long term, which is exactly what it has done in the past.
Over long periods of time, the S&P 500 produces an average annual return of about 10%, including dividends. Maybe Buffett thinks Apple has the chance to do even better than this widely followed index. If so, then there’s clearly no point in exiting the investment.
Capital allocation
As of this writing, Berkshire Hathaway owns 906 million shares of Apple, giving the conglomerate a 5.9% stake in the tech giant. Apple’s beneficial capital allocation policies provide a massive benefit to Buffett’s firm.
After a nearly two-decade pause, the iPhone maker has paid a dividend since 2012. Its quarterly payout these days is $0.24, which translates to an unexciting yield of 0.58%. However, for Berkshire this means $870 million in passive annual income. That’s a nice financial windfall.
Apple is very keen on executing share repurchases. In the past three fiscal years, the outstanding share count has been reduced by 9%. If Buffett just stays put, his company’s equity ownership will rise over time.
Cash pile
As outside observers, we really have no idea what’s going on in Warren Buffett’s head. All we can do is try and come up with explanations for his investment decisions based on the public information there is.
One piece of info we know is that Berkshire had $168 billion in cash, cash equivalents, and Treasury bills on the balance sheet at the end of last year. This is the case because there aren’t attractive buying opportunities that are also big enough to move the needle.
If Buffett decided that he wanted to sell all his Apple shares, what would Berkshire do with the $149 billion in pre-tax proceeds (at Apple’s price of $165 per share on April 19)? This would only exacerbate the current problem. Despite Apple’s massive size and expensive valuation, perhaps Buffett simply believes the stock provides a better expected return than holding cash.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
