Warren Buffett's investing prowess has become legendary. The chairman of Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.24%) started buying stocks as a child and has built a net worth of more than $90 billion. Hence, while you always have to do your own homework, it's not a bad idea to start with popular shares owned by his company.
And its top holding remains Apple (AAPL 0.62%), valued at over $125 billion as of June 30. Berkshire remains one of Apple's largest shareholders, with a 5.6% stake at the start of the year. Let's delve into what attracts Buffett to Apple's stock.
Image source: Getty Images.
1. Strong brand
Buffett loves companies that have products with a competitive advantage. That's because they aren't easily replicated. Apple, which has built a loyal following, certainly has a lineup that qualifies.
For example, consumers always anxiously await the latest iPhone version. In Apple's fiscal third quarter, which ended on June 25, the product accounted for 49% of its sales. And the iPhone continues to gain market share, with current reports pegging it at more than 50% of the U.S. market. And it released the latest version last month, which should allow it to remain competitive.
Fortunately, Apple also has other excellent products that draw in customers. These include its Mac computers, iPads, AirPods, and the Apple Watch.
2. Generating and returning cash
The success of these products has led to strong free cash flow (FCF) generation. In the first nine months of the fiscal year, Apple's FCF was $90.6 billion, or 19.3% higher than a year ago.
Apple doesn't just sit on this cash, either. It returns some of it to shareholders via share repurchases and dividends. This year, it spent $65 billion buying back shares. While that hasn't proven an efficient use of capital this year, it has in the past. In the fiscal year ended Sept. 25, 2001, management spent $85.5 billion, paying an average price of about $130 a share. That's about 7% below the current price.
Apple also used part of its FCF to pay $11.1 billion of dividends. The board of directors has a history of increasing dividends annually, including a penny increase to $0.23 a quarter starting in May 2022.
3. Valuation
Buffett doesn't mind paying up for a high-quality business. Still, he would agree that it's better to buy strong companies at more attractive valuations.
Apple's price-to-earnings (P/E) ratio has dropped to 23 from 32 at the start of the year. The stock has fallen by 22% during this span, but this has more to do with the overall market decline than with the Nasdaq Composite's 33% drop.
Meanwhile, Apple's long-term prospects remain bright. Third-quarter sales grew by 1.9% to $83 billion, but the company's ability to come out with new products, including the latest iPhone, should allow it to grow the top line at a faster clip.
Buffett has several good reasons for holding Apple stock. The key question is, should you? With a loyal customer base, popular products, and strong free cash flow, you should strongly consider adding it to your portfolio. As a bonus, you get to buy a great business at a cheaper valuation than at the start of the year.
