I rarely write about Uncle Warren, but when he makes moves, he picks them really well. Burlington Northern at $100/share was a stroke of very well-timed genius, and even more for him, I am still amazed by his Apple trade he made between 2017-2018, which was a slow and steady accumulation of a huge stake. Don’t get me wrong, he’s had his fair share of disasters (Airlines pre-Covid, for example), but for the most part his investment successes have massively overshadowed his failures.
Warren Buffett’s final cost base on his Apple shares as reported on December 31, 2018 was $35.30/share (he paid $36.044 billion for 1.021 billion shares, split-adjusted). He sold a hundred million shares by the end of 2020, ending with 907,559,761 shares of Apple at an average of $34.26/share. Prior to today’s announced divestment of 13% of his stake, those shares at $180/share amounted to $163 billion. The unrealized gain that he was sitting was $130 billion. So his 13% liquidation nets him about $21 billion and he can offset the capital losses on his Paramount trade which fizzled.
He still has a stack of $142 billion in Apple stock which, needless to say, is still a lot of capital tied up in a single company. There are competing interests that Buffett is facing – one is that the concentration risk of Apple in the overall Berkshire portfolio is massive. Two is that he does not want to give up on the tax deferral value of the unrealized gain (which is likely why his choice to recapture the losses from Paramount was to diversify out of Apple first before anything else). Three is that Berkshire is facing a lack of reinvestment choices – apparently their cash stack is now up to $188 billion and just the interest alone on this, if invested in 5% short-term government bonds, would be around $9.4 billion dollars annually.
Apple reported a diluted EPS of $3.71/share for the past six months (October 1, 2023 to March 30, 2024). This puts Apple at around a P/E of 25 and I bet you Buffett is looking at the announced additional $110 billion share purchase authorization (making it a total of about $140 billion at the end of March 30, 2024) and will be dumping into it further over time.
While the Apple franchise will continue to make a lot of money, the stock is another matter – I personally think it is about 40% over-valued. The company seems to be very happy to buy back their overpriced shares – they bought back 130 million shares in the past three months at $180 a piece, and this is likely to continue for future quarters – this demand pressure on the stock will keep its value artificially inflated until economic and technological headwinds take it down further.
Fair value, for me, for Apple is closer to $70/share. Even this price is somewhat generous and biased towards them repeating past successes nearly forever.
What I think you capture nicely in this article is how tax policy perverts corporate action. No doubt Mr. Buffett and other large holders want to avoid crystallizing their capital gains and they don’t want Apple to distribute its cash horde as a dividend either. So Apple shareholders get a giant value-destroying buyback instead.
Other than maybe Mac Book, every area of their business is pretty much stagnant or under assault. Their product aren’t really technologically superior to competitors. There’s a lot of chatter about how Apple’s numbers is way off from reality on the ground in China and what’s the disconnect. China continues to represent a big risk and head wind, and then there’s rumored $20 billion annual payment from Google coming under scrutiny. They are forced to adopt USB-C because of EU pressure – those fat margin from their cheap lightning cables are gone (good riddance for consumer and environment).
They are really a luxury goods business pretending to be a technology company but things seem to be finally catching up to them.
Fair value around $77.5 for me as well assuming they don’t grow. The stock is still priced for growth. With their current market value and FCF it will take 27.5 years for them to buy back all shares if things remain constant. But buying the incremental share will increase in cost as the number of shares decrease.
I’ve watched the entire presentation by Buffett and this is only a portion of his AAPL holdings and it remains his largest holding still. The gist is that he’s categorized this sell as a rebalance of his portfolio.
“Fair value around $77.5 for me as well assuming they don’t grow.”
Not sure I get this Justin? No growth in earnings per share, ever? That’d put fair value under $10 I think. No growth in sales but growth per share through other means?
The assumes that their FCF stays constant and it’s only growing at 2% (rate of inflation), discounting at approx 11%.
How would you come to a fair value at $10 in that case?
Sum of Perpetuities. Earnings at $7.19 (2025 est.), 96c dividend, no earnings growth, discount rate 11%.
Sacha, any thoughts on Buffet’s winking re potential Canadian investments? Given that Warren’s probable successor is Canadian, could they be looking for the “OXY” north of the border?
I heard Trudeau is going to sell him TMX for $5 billion after June 25th so Canada can get the 2/3rds inclusion rate on the capital loss.
One need some gains to be able to utilize capital losses… Definitely not JT’s situation 🙂