Increased stake checks many of the boxes of Berkshire Hathaway's
biggest investments
By Nicole Friedman and Chris Dieterich
Warren Buffett loves to say, "If there's lots of technology, we
won't understand it." But even he sees reasons to buy Apple
Inc.
Berkshire Hathaway Inc., Mr. Buffett's conglomerate, more than
doubled its Apple stake in early January and now owns about 133
million shares, or 2.5% of total shares outstanding, Mr. Buffett
said Monday on CNBC. Apple is now one of Berkshire's largest equity
holdings.
Apple, near its all-time high of just over $137 a share, a level
that makes it the most valuable U.S. public company by a margin of
more than $100 billion, isn't cheap by some standards. At that
price, Berkshire's stake is worth about $18 billion.
But it checks many of the boxes of Mr. Buffett's biggest
investments: a strong brand name, a relatively low valuation and
consistent share buybacks and dividends. Mr. Buffett has long said
that it is better to buy great businesses at fair prices than fair
businesses on the cheap.
What's more, the investment demonstrates Mr. Buffett's
longstanding conviction that a well-run company relevant to a large
and dedicated customer base can transcend traditional investment
thinking centering on concepts such as "growth" and "value."
Apple's price/earnings ratio is 14.6 based on analysts' earnings
estimates for the next 12 months, according to FactSet. That is up
from slightly under 12 before the November presidential election
but well below the broader market and even relative to other
technology shares. The forward P/E of the S&P 500 is 17.9,
while tech stocks in the S&P 500 sport a forward P/E of
18.6.
In addition, Berkshire needs to make increasingly large bets to
move the needle on its results. The conglomerate had $86 billion of
cash at year-end, and its net earnings were flat in 2016.
Berkshire spent $20 billion buying stocks since just before the
November election, partly as a way for the company to put its cash
to work, Mr. Buffett said.
"We had the money, and I like investing," he said on CNBC. "I
would so much rather have that than have the money in Treasury
bills."
Mr. Buffett started studying Apple after one of his portfolio
managers -- he didn't say whether it was Ted Weschler or Todd Combs
-- invested in the stock. Each manager oversees about $10.5 billion
for Berkshire.
Mr. Buffett has traditionally shied away from tech stocks,
saying that he doesn't understand the business, but he says Apple
is a consumer product that he understands.
Mr. Buffett used investor Philip Fisher's "scuttlebutt" method
of doing on-the-ground research to learn about a company, he told
CNBC. He queried his great-grandchildren and their friends about
how they use their iPhones. "The degree to which their lives center
around it is huge, " Mr. Buffett told CNBC.
Apple is classified as both a growth and a value stock in
certain popular index-tracking exchange-traded funds. For instance,
Apple is the largest holding in the $16 billion iShares S&P 500
Growth ETF, which filters companies by sales and earnings, among
other things. At the same time, Apple is the largest holding in the
$2.5 billion iShares Edge MSCI USA Value Factor ETF, which filters
the market by metrics including price-to-book valuation, a measure
of a company's reported net worth.
"There's all this cash that they're generating, and the company
is likely to maintain the aggressive pace of returns to
shareholders," said Daniel Flax, an analyst at investment manager
Neuberger Berman. "There are so many elements of the story that
could appeal to different investor classes."
Another aspect of Apple's appeal is how it returns cash to
shareholders in the form of quarterly dividends and share
repurchases. Apple ended last year with $246 billion in cash,
including $185.6 billion in long-term marketable securities.
Apple in 2012 began to pay shareholders a quarterly dividend for
the first time since 1995.
Apple spent $10.9 billion in the final three months of 2016 on
buying back its own shares, according to Howard Silverblatt, senior
index analyst at S&P Dow Jones Indices.
Berkshire bought its first 61 million shares of Apple in 2016 at
an average price of $110.17, the company revealed in its annual
report that was released Saturday.
The company more than doubled that purchase in January before
Apple released its quarterly earnings, Mr. Buffett told CNBC.
"He should have bought it sooner," said Jeff Matthews, a
hedge-fund manager who has written books on Berkshire. But like
when Mr. Buffett first bought Coca-Cola Co. in the 1980s, "he's
betting that what he's paying now will many years from now look
like a very cheap price."
Apple shares have climbed 18% so far this year, closing at
$136.93 apiece on Monday.
"It's at a price different than I would buy it now," Mr. Buffett
told CNBC. But "we're certainly not selling."
Write to Nicole Friedman at nicole.friedman@wsj.com and Chris
Dieterich at chris.dieterich@wsj.com
(END) Dow Jones Newswires
February 28, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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