3 reasons why Warren Buffett loves apple broth
Regardless of investment background, almost everyone knows who Warren Buffett is. Especially today, investors are very curious about the stock portfolio of the Oracle of Omaha. And why shouldn’t they be? As the global economy continues to weaken, it’s not a bad idea to see where the stock picking elite is putting their money. Currently, Buffett’s best holding Berkshire Hathaway investment portfolio is a technology giant Apple (AAPL -0.96%)and it is by far.
The iPhone maker now represents 40.1% of its portfolio, far ahead Bank of America, which is second at 14.5%. Why is one of the world’s most prominent investors so fond of Apple stocks? This is the million dollar – or should I say billion dollar – question of the day. While there are many possible answers, let’s discuss three reasons why Buffett is the #1 fan of Apple stocks.
1. The power of the brand
If you’ve taken a course on Warren Buffett Investing 101, I’m sure you’d quickly realize that the Oracle of Omaha likes companies with large economic moats. In short, an economic moat means that a business enjoys competitive advantages that position it for long-term success. In Apple’s case, the company has built a brand that is truly second to none; Honestly, I don’t know if there is a more recognizable brand. Literally, if you search “the world’s most recognizable brands” on your internet search engine, you will find that Forbes has compiled a list of the most valuable brands from 2020, and Apple has claimed the top spot.
What does a strong brand do for a business? The bottom line is that a business with fantastic brand recognition attracts and retains customers effortlessly, which means more money for the business. Counterpoint Research recently discovered that iPhones have overtaken Android for the first time in smartphone history, with Apple officially ruling 50% of the US market. The company’s global market share is 16% in the second quarter of 2022, second only to its competitor Samsung. As its brand continues to expand across the globe, the company is firmly positioned for long-term success.
2. Sustainable business model
Partly because of its world-class brand, Apple operates an extremely strong business, another trait Buffett likes to look for. Many tech companies have struggled lately due to tough macro conditions such as high inflation and rising interest rates, but the iPhone maker continues to fire on all cylinders. In the third quarter, the company’s total net sales rose 1.9% year over year to $83 billion, and its diluted earnings per share ended at $1.20. In its Products segment, iPhone sales bore the brunt, rising 2.8% to $40.7 billion. Meanwhile, its nascent services segment grew 12.1% to $19.6 billion.
Although products like the iPhone, iPad and Mac are the backbone of its business, Apple’s Services category will be its engine of growth in the years to come. Its Services segment includes a wide range of businesses such as App Store, Apple TV+, Apple Music, Apple Care and cloud services, among others. Thus, its growth picture has changed as it has become one of the biggest companies in the world, but its business remains largely profitable and well insulated from macroeconomic conditions, especially compared to other technology companies.
3. Generation of free cash flow
With a consistent business comes big money. As of the second quarter, the tech giant has a cash and cash equivalents position of $27.5 billion, and the money keeps flowing. In the second quarter alone, Apple generated $20.8 billion in free cash flow (FCF), bringing its total over the past 12 months. at $107.6 billion. What can the company do with all that money? In addition to reinvesting it back into the business, it can also reward shareholders with dividend payouts and stock buybacks — two of Buffett’s favorite things.
Currently, Apple pays a quarterly dividend of $0.23 per share, a dividend yield of 0.60%. This is not necessarily an ideal yield for dividend investors. However, the company is king in returning billions to its shareholders via share buybacks. In its third quarter, the company returned $28 billion to shareholders, bringing its total so far for fiscal 2022 to around $82 billion. Share buybacks are generally positive because they increase earnings per share (all other things being equal) and indicate that management believes the stock is undervalued or that the company has a bright future ahead of it.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Luke Meindl holds positions at Apple. The Motley Fool holds positions and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), long $120 calls in March 2023 on Apple, short $200 calls in January 2023 on Berkshire Hathaway (B shares) , short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.