Berkshire Treats Itself to a Slice of Apple

Apple on Buffett’s Plate – Berkshire Hathaway Increases Apple Holding

warren buffetBillionaire investor Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) has invested $1.07 billion in Apple Inc. (NASDAQ: AAPL) as of March 31st 2016, according to SEC filings released on May 16th, 2016. Apple has been facing flak from investors after a drop in sales in early 2016 following a decade of continuous growth. Given that Apple has turned into a debatable choice for investors these days, one might wonder if Berkshire has had a hidden agenda to bet huge money on the tech giant. It seems that Berkshire has immense confidence in Apple’s ability to launch new products to spur revenue growth. This may either come with the iPhone 7 which is expected to be introduced later this year or in product categories such as autonomous driving or virtual reality hardware or strategic steps the Company has been planning to take!!

Apple looking at new growth approach

In January 2016, Apple forecast its first decline in sales in more than a decade, underpinning concerns that the Company is reaching the limits of iPhone growth. As a consequence, Chief Executive Officer, Tim Cook, is pivoting toward services and exploring new technologies such as self-driving cars to reduce reliance on the iPhone. In the second week of May 2016, Apple struck a $1-billion deal with Chinese company Didi (legal name Xiaoju Kuaizhi Inc., which means “little orange”), which is seen as a win-win deal for both parties. For Apple, the deal is seen as a lucrative investment since it could provide access to big-ticket companies in the Chinese market. Didi is backed by China’s two largest Internet companies, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. These companies could help Apple market the Apple Pay electronic payments system and other services, as well as help the US Company foray into transportation.

According to Bloomberg, while Apple’s average 12-month target price has fallen from last July’s peak, it remains at $124.60, about 33% above current levels. Apple’s shares jumped 3.7% to $93.88 after Berkshire’s announcement, valuing Apple at about $514 billion. It appears that Berkshire has cashed in on the opportunity offered by Apple’s share slide of nearly 30% since the middle of 2015 as shown below.

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Apple investment could auger well for Berkshire

Apple trades at a multiple of 10.5 times its earnings per share based on Bloomberg calculation. The shares have a dividend yield of 2.35%, ranking Apple above the average of its peers on the Standard & Poor’s Information Technology index. Given Apple’s iconic brand name and financial model, Berkshire’s investment in the tech giant may not be misplaced.

In Apple’s most recent earnings report, the Company announced a raise in its quarterly dividend to $0.57 per share. Since 2014, Apple’s quarterly dividend has grown by 23.53%. This growth is significant, and Apple’s current dividend yield is a solid 2.4%, often seen as a huge positive by investors.

New-found romance with technology

Known to avoid technology investments, Berkshire has somewhat found comfort in technology stocks in recent years. Having previously invested in Intel Corp. (NASDAQ: INTC), it is now backing billionaire Dan Gilbert’s bid for Yahoo! Inc.’s (NASDAQ: YHOO) core assets. Berkshire’s incursion into the technology sector has had mixed results so far. In early 2011, Berkshire began investing billions in International Business Machines Corp.  (NYSE: IBM). The Company has increased that stake slightly in the first quarter of 2016, according to the recent SEC filings. Besides its latest interest in tech stocks, Berkshire also added to its holdings of Visa Inc. (NYSE: V), Deere & Company (NYSE: DE), and Bank of New York Mellon Corp. (NYSE: BK), while giving up its stake in AT&T Inc. (NYSE: T).

Smart money follows Buffett!!

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