Warren Buffett, longtime CEO and chairperson of Berkshire Hathaway, has had a remarkable career spanning decades, earning a reputation as one of the most successful investors of all time. Utilizing his remarkable skill set, he transformed Berkshire Hathaway from a struggling textile company into a multinational holding company with a valuation of over $750 billion.
In his 1988 annual letter to shareholders, Buffett penned that when it comes to owning outstanding businesses with excellent management, "our favorite holding period is forever." Considering the enduring success and wisdom of Warren Buffett, here are two of his favorite stocks that are worth holding for the long term -- and potentially forever.
1. Apple
At a stake worth over $150 billion, Apple (AAPL -0.35%) represents nearly 50% of Berkshire's portfolio, making the tech company by far and away the largest position it holds. Interestingly enough, it wasn't Warren Buffett who initiated his company's position in the $3 trillion company back in 2016; rather, it was his two investing managers, Todd Combs and Ted Weschler.
Nonetheless, Buffett, who once claimed "technology is just something we don't understand, so we don't invest in it," has undoubtedly warmed up to Apple. At Berkshire's most recent annual meeting, Buffett called Apple a "better business than any other we own [outright]".
As for why Buffett's love grew for Apple, the company returns an incredible amount of capital to its shareholders in the form of dividends and share buybacks. First, Apple has grown its dividend by nearly 17% annually over the last 10 years and currently pays a quarterly dividend of $0.24 per share.
Second, Apple spends a fortune each year on share repurchases, including $90 billion in its fiscal-year 2022 and $38 billion during the first half of its fiscal-year 2023. As a result of Apple's aggressive share buybacks, the company has lowered its outstanding share count by 37.5% over the past decade.
Buffett is a fan of share repurchases at reasonable prices because an investor's ownership stake can increase without purchasing any additional shares. For Berkshire, that meant its position in Apple grew from 5.39% in 2020 to 5.55% in 2021 without purchasing a single share. Since then, Berkshire has added to its Apple stake several times, and its ownership level reached 5.8% at the end of its first quarter of 2023.
As for the bear case for Apple, if Warren Buffett calls it his best business, it's going to be difficult to find anything wrong with the company. However, the stock does look on the expensive side when using a popular valuation metric like the price-to-earnings (P/E) ratio, which measures the stock price in relation to the company's earnings. For Apple, its P/E ratio currently sits near 33, which is higher than its five-year average of 25.
Still, for a company like Apple, which has a history of excellence and the backing of Warren Buffett, long-term investors should consider dollar-cost averaging into one of the best businesses ever created if they are worried about its current valuation.
Image source: The Motley Fool.
2. Kroger
Berkshire Hathaway first purchased Kroger (KR -0.75%) in late 2019, and similar to Apple, the idea came from one of Buffett's lieutenants. Shares of the leading operator of grocery stores in the U.S. are up roughly 70% since then, handily outperforming the benchmark S&P 500's nearly 50% return. While Berkshire has both added and trimmed its position in Kroger, it still has a nearly 7% ownership stake in the grocery store operator.
Kroger is another dividend stock, having paid and raised its dividend for 17 consecutive years. Currently, Kroger pays its shareholders a quarterly dividend of $0.29 per share, representing an annual dividend yield of 2.4%. Similar to Apple, Kroger's management is buying back its own stock hand over fist, having repurchased 30% of its outstanding shares during the last 10 years.
Kroger did pause its share repurchasing program due to its pending merger with Albertsons in a deal valued at $24.6 billion. The deal will undoubtedly cause some debt concerns since the company already has nearly $10 billion in net debt (total debt minus cash and cash equivalents).
In a high-interest rate environment, growing debt can weigh heavily on the balance sheet of a company, but management believes it can achieve a healthier net leverage ratio (which the company defines as net debt divided by the sum of the most recent four quarters' adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization) to 2.5 times EBITDA in the first 18 to 24 months after the merger.
For comparison, Kroger's net leverage ratio at the end of its fiscal first quarter 2023 was a much-healthier 1.3 times EBITDA. A net leverage ratio of 3 times EBITDA could signal trouble, so investors should keep an eye on whether management is able to reach its own goals after the merger. Despite these debt concerns, the company intends to continue paying and raising its quarterly dividend.
Perhaps more importantly, the merger presents a compelling opportunity for an already dominant player in the grocery industry to expand its market share significantly.
To illustrate, in Kroger's previous fiscal year, the company generated $148 billion in revenue and $2.2 billion in net earnings from approximately 2,800 stores across the United States. After the merger, the combined entity is projected to achieve an estimated revenue of $210 billion, $3.3 billion in net earnings, and operate from a larger network of 5,000 locations.
While the deal awaits approval from the Federal Trade Commission, the management teams of both companies maintain a positive outlook, anticipating completion in early 2024.
Are these Buffett stocks worth buying?
Warren Buffett is often referred to as the Oracle of Omaha for finding and buying stocks that have tremendous upside over the long term. While Buffett didn't first pick these two particular stocks, they have both been bright spots in Berkshire's portfolio due to their dominance in their respective industries and growing dividends. That should help make Apple and Kroger compelling additions to any long-term investor's portfolio.
