Warren Buffett's reason for investing in Apple should be music to Tim Cook's ears (AAPL, BRK)
AP
Billionaire investor Warren Buffett likes Apple: In an interview on CNBC on Monday, he revealed his company, Berkshire Hathaway, had doubled its holding in Apple, bringing its stake to $18 billion, or 133 million shares.
Clearly, the feeling is mutual.
At Apple's annual shareholder meeting on Tuesday, CEO Tim Cook said that he was "very proud" that Berkshire Hathaway had invested in the iPhone company.
"I think what’s good for Apple is to have long term shareholders," Cook said. "We’re very proud that Berkshire Hathaway is now a shareholder because they tend to be a long shareholder."
Cook went on to discuss what Apple could do to encourage more shareholders like Buffett, who tend to buy stock and hold on to it for years, and sometimes decades.
"[CFO] Luca [Maestri] and I have talked about, could we sort of structure a dividend, with the board's approval obviously, such that it pays for longer term shareholding as opposed to shorter. There’s lots about that that I like," Cook said.
"It’s not clear how to pull this off on a practical basis. I think we have to keep the communication going and be more attractive to longer term shareholders like the Berkshire Hathaways and others," Cook said, adding that he hopes there are tax changes to disincentivize shareholders moving in and out of stocks frequently.
When asked by CNBC why he invested in Apple, Buffett replied, "Cause I liked it."
A perfect fit
AP ImagesTurns out, although Buffett famously eschews technology companies, Apple is a perfect fit for his investing philosophy.
Although he's not an expert in the software or technology that goes into the iPhone — in fact, he uses a flip phone — Berkshire Hathaway now owns 2.5% of Apple's outstanding shares.
While Apple isn't Coca-Cola or Wells Fargo, other blue-chip stocks Berkshire Hathaway holds in large numbers, it checks off all the boxes Buffett looks for in its "value" investing philosophy, according to a recent story from The Wall Street Journal.
Here's what Berkshire Hathaway looks for:
- A low valuation. Apple's forward price-to-earnings ratio, a way to gauge how expensive a stock is, is currently at 14.6 — significantly lower than other tech companies like Google, Microsoft, and Amazon, which have PE ratios that suggest massive future growth.
- Regular and predictable dividends and buybacks. Apple has paid out more than $4 per share in dividends over the past two years, and has bought back 760 million shares since 2013. Apple spent nearly $11 billion in the 4th quarter of 2016 on buybacks alone.
- A strong consumer brand. According to a recent survey by Brand Finance, Apple has the second most valuable brand in the world, behind only Google.
The feeling is mutual
iStockBuffett hasn't spoken with Cook yet about his stake in Apple. "I usually see him maybe twice a year. I see him at Sun Valley and perhaps one other time," he told CNBC.
But given his proclivity to buy stakes in companies and keep them for years, Cook can feel justified in predicting Buffett investing in Apple for the long run.
It's a change from some previous high-profile Apple investors, such as Carl Ichan, who sold his remaining stake in Apple last year. While he was an Apple investor, he sometimes wrote open letters to Cook, giving his opinions on unannounced product and the stock's ultimate value.
Buffett's investment thesis is not based on an Apple Car or Apple television set, though. He's invested in Apple because he likes that its underlying fundamentals are stellar and it products are "sticky," meaning current customers are overwhelmingly likely to be future customers, too. That's a point that Apple executives regularly make during earnings calls and public appearances.
It's another sign that Buffett is investing in Apple for years. He said:
When I take my great-grandchildren to Dairy Queen they bring along friends sometimes. They've all got a iPhone and, you know, I ask 'em what they do with it and how ... whether they could live without it, and when they trade it in what they're gonna do with it. And of course, I see when they come to the furniture mart that people have this incredible stickiness of — with the product. I mean, if they bring in an iPhone, they buy a new iPhone. I mean, they're ... it just has that quality. It gets built into their lives.
That kind of thesis is music to Apple executives. Buffett and Cook will have a lot to discuss the next time they see each other, and for years to come.
Biz Carson contributed reporting.