Coca-Cola (NYSE: KO) is not the biggest position in Warren Buffett’s portfolio, but it is one of the billionaire’s favorites — and one that likely will remain there at current levels.
Buffett started buying shares of the world’s biggest nonalcoholic beverage maker in 1987 and continued adding to the position for a period of seven years. Those 400 million shares haven’t budged since. In fact, he has even described his holding on to Coca-Cola as “a Rip Van Winkle slumber.”
Buffett, known to drink several cans of Coke a day, clearly loves the product, and he also loves the fact that others feel the same way, too. This brand strength offers the company a moat, or competitive advantage, a key element Buffett looks for in a company. On top of this, the beverage giant has grown earnings over time and rewards investors with dividends.
For these reasons, Coca-Cola is likely here to stay in its position in the Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) portfolio. But it might not be the only stock to win Buffett’s permanent loyalty. In fact, a stock that he just reduced his position in could actually join Coke as one of Berkshire Hathaway’s “forever” holdings. My prediction is this stock will become Buffett’s next Coca-Cola …
Buffett recently sold some shares of this stock
So, which stock am I talking about? Well, it’s another company that’s a household name, though it operates in the technology industry rather than the beverage sector: Apple (NASDAQ: AAPL).
But wait a minute, you might be saying, Buffett sold some of his shares in the iPhone maker during the second quarter. Isn’t that a bad sign?
Not necessarily. At the Berkshire Hathaway annual meeting in May, Buffett signaled that his Apple sales are linked to locking in the current 21% capital gains tax rate, and not due to a loss of faith in the company. He expects the tax rate to go up, considering the current size of the federal deficit. Even counting the sale of 49% of his Apple position, Buffett said it is “extremely likely” that at the end of the year, it will be Berkshire’s largest common-stock holding.
The recent sale in Apple brings the holding down to 400 million shares. Sound familiar? That’s the same number of shares Berkshire holds in Coca-Cola. This, of course, is an interesting detail to point out, but I’m not basing my prediction on it. I have a stronger argument for why Buffett could view Apple as his next Coca-Cola.
A “brilliant CEO”
And this has to do with his confidence in the way the company is run and its solid earnings record. In Buffett’s 2021 shareholder letter, he referred to Tim Cook as Apple’s “brilliant CEO” and praised his decision to repurchase Apple shares. Share buybacks increase the ownership of current holders without them paying a dime.
These repurchases helped Berkshire increase its holding from 5.2% of Apple in 2018, when it completed its purchases of the stock, to 5.4% by 2020. Berkshire started buying Apple shares back in 2016.
Cook’s expertise also has guided Apple along the path of double-digit earnings growth over the past five years. And, like Coca-Cola, Apple has a significant moat, with users of the iPhone flocking to the company each time a new version is released. Last year, for the first time ever, Apple won the top seven spots on the list of the top-selling smartphones that’s compiled by Counterpoint, a technology market research firm.
An “enduring moat”
“A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” Buffett wrote in his 2007 letter to shareholders, emphasizing the importance of this when choosing investments.
Lastly, one more thing about Apple could help it become the “second Coca-Cola” in the Berkshire Hathaway portfolio: the company’s commitment to dividends. Berkshire Hathaway has averaged about $775 million annually in Apple dividends since 2018.
Technology companies aren’t known to pay out tremendous dividends since they invest a lot back into growth, so Apple’s dividend isn’t the biggest on the block. But the company has steadily paid one since 2012. And at $1 per share annually, for a dividend yield of 0.4%, it’s an attractive part of the complete package.
All of this prompts me to predict that, like Coca-Cola, Apple will be a permanent fixture in the Berkshire Hathaway portfolio. And thanks to its strong earnings track record, strong moat, and dividend policy, this tech stock makes a great addition to any portfolio needing the fantastic combination of growth and safety.
Should you invest $1,000 in Apple right now?
Before you buy stock in Apple, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $729,857!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns as of September 9, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Prediction: This Stock Will Become Warren Buffett’s Next Coca-Cola was originally published by The Motley Fool
