Buffett trims Apple’s stake over tax concerns, cautious on the market, yet remains optimistic about Apple’s resilience.
- Warren Buffett’s Berkshire Hathaway continues to reduce its Apple holdings, citing potential tax implications, despite maintaining optimism about the company’s long-term prospects.
- Berkshire’s cash position reaches a record high, reflecting Buffett’s cautious stance on the current stock market and his preference for high-reward, low-risk opportunities.
- While Berkshire’s reduction in Apple shares raises questions about the stock’s attractiveness, Buffett’s long-term commitment underscores Apple’s enduring strengths despite short-term challenges.
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In Berkshire Hathaway’s (BRK.B) latest report, it was revealed that Warren Buffett continues to divest his Apple (AAPL) holdings by about 13%, totaling $135 billion. Despite this reduction, Apple remains by far the largest position in the company.
Moreover, Buffett’s statements suggest ongoing optimism with the thesis, indicating that the reduction may have been due to tax considerations. Let’s delve into some of the optimism surrounding the stock and whether it’s worth continuing to buy Apple.
The Facts About Berkshire’s Q1 and Apple’s Position:
By the end of Q1 2024, even after the billions of dollars reduction, Apple’s shares still held the top spot as Berkshire Hathaway’s most significant position by far. While the Apple position amounts to $135 billion, the second position in Bank of America (BAC) is $39.2 billion, and the third in American Express Company (AXP) is $34 billion.
Alongside Coca-Cola (KO) and American Express, Apple has been cited as one of the companies Berkshire Hathaway will always be invested in unless something very unexpected happens. Not only that, but compared to these two, Buffett referred to Apple as an “even better business”: “And we own Apple, which is an even better business, and we will own, unless something really extraordinary happens, we will own Apple and American Express and Coca-Cola.”
However, if Apple is such a good business, why the significant reduction in exposure to the thesis? Some might argue it’s due to price, but that wasn’t the case. Buffett explained that he believes taxes in the U.S. could rise, hence selling a small portion of the position isn’t a bad move.
“We are paying a 21-percent federal rate on the gains we’re taking in Apple and that rate was 35 percent not that long ago, and it’s been 52 percent in the past when I’ve been operating. […] They can change that percentage any year. Warren Buffett
My take on Apple Stock:
Despite this reasonable explanation for the reduction in Apple, something else caught my attention. Buffett (and the Berkshire team) don’t seem to find the stock market attractive at the moment. It’s worth noting that Buffett’s philosophy still revolves around value investing, meaning he not only targets good companies but also likes to pay a fair price for stocks.
Berkshire’s cash position reached an all-time high, with nearly $190 billion in cash and equivalents. Buffett was explicit about not seeing many opportunities: “We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money”
This also makes sense considering the high interest rates. Even though Berkshire Hathaway would still be holding onto its high cash position with a low-interest rate, treasury rates at around 5% certainly provide even more comfort to wait for new opportunities.
All of this aligns with Apple Stock’s low margin of safety. Both the Free Cash Flow Yield and Shareholder Yield of Apple Stock are around 3.6%, below the rates of 10-year treasuries. While this may be acceptable for many stocks, it doesn’t seem as attractive for a company facing some short and medium-term challenges, as well as a stock with timid long-term growth prospects.
It’s worth mentioning, that is my opinion on Apple Stock. Berkshire, to maintain investments above $130 billion, certainly remains optimistic about the thesis and knows how solid the company’s moats are.
The Verdict
Based on the information above, according to Berkshire’s past statements at the meeting, the reduction in Apple’s position is explained (at least in part) by expectations of potential tax increases. Moreover, Buffett and the company’s team remain optimistic about the thesis and are likely to carry it for a long time unless something highly unlikely occurs.
Berkshire’s reduction shouldn’t be a reason for selling a stock. Investors need to consider if the thesis still makes sense for them, based on outlook, fundamentals, and profile.
Although I believe Apple’s current price isn’t particularly attractive, credit must be given to the company, which has unique robustness, good cash generation, and even in tougher times, manages to deliver growth in some verticals (like services).
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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