It's no surprise that most investors follow Warren Buffett closely.Based on his management track record berkshire hathawayhe is arguably the greatest allocator of capital in history.
Oracle of Omaha has owned many stocks over the years, but none have made such big moves. apple (NASDAQ:AAPL). Berkshire first purchased the stock in the first quarter of 2016, and since the beginning of the year, shares of The Magnificent Seven have soared 527% (as of April 19). It accounts for 41% of the company's portfolio.
Apple has a market capitalization of a whopping $2.6 trillion and trades at a price-to-earnings ratio of 25.7 times after such impressive performance. Given this, you're probably wondering why Buffett still owns the stock.
After thinking about it a bit, I think there are four reasons.
Perpetual stock
The first likely reason why Mr. Buffett remains a shareholder is because his favorable holding period is perpetual. He's only owned Apple stock for less than 10 years, but the powerful company has features that could make it an everlasting stock.
Because we have perhaps the most powerful brand on the planet, we benefit from: pricing power, consumers are willing to pay a higher price for that hardware device. The combination of its products and services creates an incredibly powerful ecosystem. And Apple generates tremendous amounts of free cash flow.
Because Berkshire hasn't sold a significant portion of its stock, Buffett can be confident that his company won't continue to pay huge taxes. This way, compound interest can continue to work its magic.
high profit margin
Another less obvious reason why Buffett remains an Apple investor is simply because he believes the company's stock will continue to generate market-beating returns over the long term, which is exactly what it has done in the past. That's what happened.
over a long period of time S&P500 The average annual return including dividends is approximately 10%. Perhaps Buffett thinks Apple has a chance to do even better than this widely followed index. If so, it is clear that there is no point in withdrawing from 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 beneficial capital allocation policy has brought significant benefits to Buffett's company.
After a nearly 20-year hiatus, the iPhone maker has been paying dividends since 2012. The most recent quarterly dividend was $0.24, which equates to an impressive yield of 0.58%. But for Berkshire, that means $870 million a year in passive income. That's a great economic benefit.
Apple is very keen on implementing stock buybacks. Over the past three fiscal years, the number of shares outstanding has decreased by 9%. If Buffett stays put, his stake in the company will increase over time.
pile of cash
As outside observers, we have no idea what's going on inside Warren Buffett's head. All we can do is come up with explanations for his investment decisions based on publicly available information.
One piece of information we do know is that Berkshire has $168 billion in cash, cash equivalents, Treasury bills It appeared on the balance sheet at the end of last year. This is because there are no attractive buying opportunities large enough to move the needle.
If Buffett decides he wants to sell all of his Apple stock, what will Berkshire do with its $149 billion in pre-tax profits (Apple's price on April 19th was $165 per share)? This will only worsen the current problem. Despite Apple's massive size and expensive valuation, Buffett probably simply believes that stocks offer a higher expected return than holding cash.
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Neil Patel and his clients have no position in any stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Why does Warren Buffett still own Apple stock even though it has soared 527%? Originally published by The Motley Fool
