Warren Buffett loves Apple (NASDAQ:AAPL). It’s the largest holding in the Berkshire Hathaway stock portfolio and Buffett refers to it as the second of Berkshire’s ‘Four Giants’.
I’ve recently added Apple shares to my own portfolio. Last week, I invested £6,500 in Apple stock.
For a portfolio like mine, that’s a significant investment. But I think it will prove to be a good one over time.
Apple has everything that I’m looking for in an investment. It’s a great business, and I think I’ve managed to buy the shares at a decent price.
The business
What makes Apple a great business? For me, it’s the company’s ability to produce cash.
Apple generates significant cash. More importantly, its operations don’t require the company to reinvest much of that cash to fund growth.
Over the last 12 months, Apple’s operating income came in around $118bn. The crucial point, though, is that the company managed to produce this using just $40bn in tangible assets.
The company therefore doesn’t use much cash in its operations. As a result, 91% of Apple’s operating cash becomes free cash that can be distributed to shareholders.
Compared to other businesses, that’s impressive. Microsoft converts 73% of its operating cash to free cash and for Meta Platforms, the number is 61%.
Price
Apple has a terrific brand and that allows it to produce impressive business metrics. But it’s had those for a long time and I’ve only recently decided to buy the stock.
The reason is that the stock has only recently fallen to a price that I consider attractive. Following a 17% decline since the start of the year, Apple’s share price reached $149.
At the Berkshire Hathaway Annual Meeting, Buffett said that he would buy the stock at $150 or lower. I also think that the stock is cheap at that price.
A per share price of $150 puts the entire company at just over $2.4trn. According to its most recent balance sheet, Apple also has just under $125bn in debt and around $35bn in cash.
That gives the company an enterprise value of $2.5trn. Against that, a free cash return of $107bn amounts to a business yield of 4.28% annually.
At that price, 8% growth over the next decade achieves an average annual return above 6%. A more optimistic 12% annual growth takes the return to 7.5%.
Is that achievable? I think so – Apple has grown its free cash flow per share by an average of 17.5% annually, so continued growth of between 8% and 12% seems reasonable to me.
Apple shares
As with any investment, Apple stock carries risk. In a recession, the company’s consumer-focused products might not sell as well. Over time, though, I expect the company to perform strongly. The smartphone market is growing and I expect the company to benefit from this.
I don’t know where the price of Apple shares will go from here – it might fall further. If it does, I’ll be happy to buy more.