Regardless of investing experience, almost everyone knows who Warren Buffett is. Especially today, investors are very curious about the Oracle of Omaha's stock portfolio. And why shouldn't they be? As the global economy continues to soften, it's not a bad idea to see where the elite stock picker is putting his cash. Currently, the top holding in Buffett's Berkshire Hathaway investment portfolio is tech giant Apple (AAPL 1.18%), and it's by a long shot.
The iPhone maker represents 40.1% of his portfolio today, miles ahead of Bank of America, which is the runner-up at 14.5%. Why does one of the world's most prominent investors love Apple stock so much? That's the million-dollar -- or should I say billion-dollar -- question of the day. Though there are many possible answers, let's discuss three reasons Buffett is the No. 1 fan of Apple stock.
1. The power of the brand
If you completed a course on Warren Buffett investing 101, I'm certain you would quickly realize that the Oracle of Omaha loves companies with wide 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; I'm honestly not sure if there's a more recognizable brand. Quite literally, if you search "most recognizable brands in the world" on your internet search engine, you'll find that Forbes compiled a list of most valuable brands as of 2020, and Apple claimed the top spot.
What does a powerful brand do for a company? The bottom line is that a company with fantastic brand recognition attracts and retains customers effortlessly, which means more money for the business. Counterpoint Research recently found that iPhones have surpassed Android for the first time in the history of smartphones, with Apple officially reigning over 50% of the U.S. market. The company's global market share is 16% as of the second quarter of 2022, second behind competitor Samsung. As its brand continues to stretch around the world, the company is firmly positioned for long-term success.
2. Durable business model
In part because of its world-class brand, Apple operates an extremely sturdy business, another characteristic Buffett likes to search for. Many technology companies have struggled of late due to harsh macro conditions like high inflation and rising interest rates, but the iPhone maker continues to fire on all cylinders. In its third quarter, the company's total net sales grew 1.9% year over year to $83 billion, and its diluted earnings per share finished at $1.20. In its Products segment, iPhone sales carried the weight, rising 2.8% to $40.7 billion. Meanwhile, its budding Services segment increased 12.1% to $19.6 billion.
Though products like iPhone, iPad, and Mac are the backbone of its business, Apple's Services category will be its growth driver in the coming years. Its Services segment includes a wide range of businesses such as the App store, Apple TV+, Apple Music, Apple Care, and cloud services, among others. Thus, its growth picture has changed as it has evolved into one of the world's largest companies, but its business remains widely profitable and well insulated from macroeconomic conditions, especially compared to other tech firms.
3. Free cash flow generation
With a consistent business comes a lot of cash. As of Q2, the tech giant boasts a cash and cash equivalents position of $27.5 billion, and money keeps pouring in. In the second quarter alone, Apple generated $20.8 billion in free cash flow (FCF), bringing its total over the past 12 months to a jaw-dropping $107.6 billion. What can the company do with all that cash? In addition to reinvesting it into the business, it can also reward shareholders with dividend payments and stock buybacks -- two of Buffett's favorite things.
At the moment, Apple pays a quarterly dividend of $0.23 per share, equal to a 0.60% dividend yield. That's not necessarily an ideal yield for dividend investors. However, the company is the king of returning billions to its shareholders via stock buybacks. In its third quarter, the company returned $28 billion to its shareholders, bringing its total so far in fiscal 2022 up to roughly $82 billion. Stock buybacks are generally positive because they increase earnings per share (all else equal) and indicate that management believes the stock is undervalued, or that the company has a bright future ahead.