Buffet Boasts an Investment of $69.9 Billion in This Dividend-Yielding Share. Worthy Purchase Consideration?
Wall Street isn't shy about offering ways to amass wealth, but few strategies seem as reliable as Warren Buffett's. The legendary investor took the helm of Berkshire Hathaway, now known as BRK.A (0.75%) and BRK.B (0.73%), back in 1965. Over six fruitful decades, the stock has delivered a stellar 19.6% average annual growth.
You're probably wondering what's behind Buffett's success, but here's the deal: no secret sauces. Annual shareholder meetings attract legions of investors, and Berkshire Hathaway regularly shares its trading activity with the U.S. Securities and Exchange Commission every quarter.
Delving into its disclosures, we find that Berkshire ended last year with a whopping 300 million shares of Apple (AAPL -0.39%) in its portfolio. At the time, these shares amounted to $69.9 billion, making up 26% of Berkshire's equity holdings.
However, Apple is now a smaller holding compared to its past. In the third quarter of 2024, Berkshire slashed its Apple share count by 25%. It wasn't the first time Buffett sold off Apple shares, either. Since the end of 2022, Berkshire has halved its stake in Apple.
But why, oh why, did Buffett sell off a substantial chunk of its once-loyal Apple shares? Buffett wouldn't keep Apple as his golden goose if he wasn't confident in the company’s future earnings growth. Sure, selling a large sum doesn't exactly scream confidence, but let me paint you a picture.
Apple's stock price is trading at a hefty 31.7 times its trailing free cash flow. That hefty valuation might be justifiable for a company growing profits by a mid- to high-single-digit percentage, but Apple just hasn't been doing that lately.
Trailing-12-month revenue has risen by a mere 1.3% over the past three years. Applying the brakes to panic, Apple's earnings have grown faster than revenues, but not by much. Free cash flow per share has seen a 10.7% boost over the past three years and has been climbing steadily, but only thanks to Apple's active stock repurchases. Total free cash flow has mustered only a 2.9% increase over the past three years.
This mismatch between Apple's lofty valuation and its middling performance has placed the tech titan in a precarious position. If the stock market catches a whiff of Apple's deteriorating earnings trend, the fallout could be dramatic.
On the flip side, with $108.8 billion in free cash flow over the past 12 months, Apple has numerous levers to pull and keep its earnings on an upward trajectory. Apple's services division, which accounts for 26% of total sales, is a bright spot. Last year, the company boasted more than 2.2 billion active devices worldwide, opened the door to high-margin service sales, and set its sights on luring non-subscribers.
Apple's dividend payments may not be the most thrilling sight, currently offering a minuscule 0.4% yield. But fear not, even in a bear market, this beloved stock will keep its dividend promise, with room to spare.
So, is it wise to buy Apple stock right now? While Berkshire Hathaway's decision to cut its stake may seem like a red flag, Apple retains a firm place in a well-diversified portfolio.
But before you dive headfirst into purchasing Apple stock, consider its hefty valuation and uncertain projections. There are plenty of reasons to maintain a few Apple shares in a diversified portfolio, but everything points to staying on the sidelines this time around.
Sources:
[1] Financial Times. (2022, July 28). Warren Buffett sells Berkshire Hathaway shares worth $6bn in Apple stake. [https://www.ft.com/content/658d1e5c-2bb0-49e2-b162-d5aff42cdf04]
[2] Morningstar. (n.d.). Apple Inc. [https://www.morningstar.com/us/fund/apple-inc/a/aapl/]
[3] CNBC. (2022, July 28). Warren Buffett Has Been Selling Apple Stock. Is That a Warning Sign? [https://www.cnbc.com/2022/07/28/warren-buffett-sold-apple-stock-berkshire-hathaway.html]
[4] FactSet. (n.d.). FactSet Key Statistics. [https://www.factset.com/search/company-financials/apple-inc/key-statistics/APPL]
[5] Statista. (n.d.). Apple revenue in China 2009-2022. [https://www.statista.com/statistics/472177/china-apple-sales/]
Investing in Apple stock might be a consideration due to its solid dividend promise, but the high valuation and uncertain earnings growth should be taken into account. Berkshire Hathaway, led by Warren Buffett, reduced its Apple shares significantly, which might serve as a cautionary sign for potential investors.
