It’s no surprise that most investors follow Warren Buffett closely. Based on his track record in management Berkshire HathawayHe is arguably the greatest allocator of capital of all time.
The Oracle of Omaha has owned many stocks over the years, but none have moved the needle quite like Apple (NASDAQ:AAPL). Berkshire first bought shares in the first quarter of 2016. Since the beginning of the year to date, shares of the “Magnificent Seven” have risen 527% (as of April 19). It represents 41% of the conglomerate’s portfolio.
Apple’s market cap is a whopping $2.6 trillion, and after such a remarkable performance, shares are trading at a price-to-earnings ratio of 25.7. This makes you wonder why Buffett still owns stocks.
After some thought, I believe there are four reasons for this.
In stock forever
The first possible reason Buffett remains a shareholder is that his favorable holding period is forever. He hasn’t even owned Apple stock for a decade, but this dominant company has characteristics that could make it a stock for the ages.
It arguably has the strongest brand in the world and is profiting from it Pricing power, as consumers are willing to pay high prices for its hardware devices. Combining its products with services creates an incredibly powerful ecosystem. And Apple produces an insane amount of free cash flow.
Because Berkshire isn’t selling a significant portion of its shares, Buffett can be assured that his company won’t incur a huge tax liability. In this way, compounding can continue to have its effect.
High return
Another, less obvious reason why Buffett is still an Apple investor is simply because he believes the stock will continue to deliver above-average 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 approximately 10%, including dividends. Perhaps Buffett believes Apple has a chance to do even better than this widely followed index. If so, then there is clearly no point in exiting the investment.
Capital allocation
As of this writing, Berkshire Hathaway owns 906 million shares of Apple stock, giving the conglomerate a 5.9% stake in the tech giant. Apple’s favorable capital allocation policy gives Buffett’s company a huge advantage.
After a break of almost two decades, the iPhone manufacturer has been paying a dividend since 2012. The quarterly distribution is currently $0.24, which represents an unexciting yield of 0.58%. However, for Berkshire, this represents $870 million in annual passive income. That’s a nice financial windfall.
Apple is very interested in conducting stock buybacks. Over the last three fiscal years, the number of shares outstanding has been reduced by 9%. If Buffett just sticks with it, his company’s stock will increase over time.
Pile of money
As outside observers, we really have no idea what’s going on in Warren Buffett’s head. We can only try to find explanations for its investment decisions based on the available public information.
One piece of information we know is that Berkshire had $168 billion in cash, cash equivalents, etc Treasury bill in the balance sheet at the end of last year. This is because there are no attractive buying opportunities that are also big enough to move the brand.
If Buffett decided to sell all of 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 high valuation, Buffett may simply believe the stock offers a better expected return than holding cash.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
After Apple Stock Soars 527%, Why Does Warren Buffett Still Own It? was originally published by The Motley Fool