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Coca-cola (NYSE: KO) isn’t the largest position in Warren Buffett’s portfolio, but it’s one of the billionaire’s favorites — and one that’s likely to remain there at current levels.
Buffett began buying shares of the world’s largest non-alcoholic beverage company in 1987 and continued to grow the position over a seven-year period. Those 400 million shares have not changed since. In fact, he has even described his adherence to Coca-Cola as “a Rip Van Winkle slumber.”
Buffett, who is 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. This brand power gives the company a competitive advantage, a key element that Buffett looks for in a company. Furthermore, the beverage giant has seen its profits grow over time and rewarded investors with dividends.
For these reasons, Coca-Cola will likely maintain its position in the world Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) portfolio. But it may not be the only stock that manages to win Buffett’s permanent loyalty. In fact, a stock in which he just reduced his position could join Coke as one of Berkshire Hathaway’s “forever” holdings. My prediction is that this stock will become Buffett’s next Coca-Cola…
Which share am I talking about? Well, it is also a company that is a household name, even though it operates in the technology industry and not in the beverage sector: Apple (NASDAQ: AAPL).
But wait a minute, you might say: Buffett sold part of his shares in the iPhone maker during the second quarter. Isn’t that a bad sign?
Not necessarily. At Berkshire Hathaway’s annual meeting in May, Buffett indicated that his Apple sales are related to maintaining the current 21% tax rate on capital gains, and are not due to a loss of confidence in the company. He expects the tax rate to rise given the current size of the federal deficit. Even factoring in the sale of 49% of his shares in Apple, Buffett says it is “very likely” this will be Berkshire’s largest common stock investment by year’s end.
Apple’s recent sale brings its stake back to 400 million shares. Sound familiar? That’s the same number of shares Berkshire has in Coca-Cola. This is of course an interesting detail to point out, but I’m not basing my prediction on it. I have a stronger argument for why Buffett might see 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 profit figures. In Buffett’s 2021 shareholder letter, he called Tim Cook Apple’s “brilliant CEO” and praised his decision to buy back Apple shares. Buying back shares increases the ownership of current holders without them having to pay a cent.
These buybacks allowed Berkshire to increase its stake in Apple from 5.2% in 2018, when it completed the stock purchase, to 5.4% in 2020. Berkshire started buying Apple shares back in 2016.
Cook’s expertise has also led Apple on a path to double-digit earnings growth over the past five years. And just like Coca-Cola, Apple has done just that an important canalwith iPhone users flocking to the company every time a new version is released. Last year, for the first time ever, Apple won the top seven spots on the list of best-selling smartphones compiled by Counterpoint, a technology market research firm.
A “permanent moat”
“A truly great company must have a lasting ‘moat’ that protects an excellent return on invested capital,” Buffett wrote in his 2007 letter to shareholders, emphasizing the importance of this when choosing investments.
Finally, there’s one thing about Apple that could make it the “second Coca-Cola” in Berkshire Hathaway’s portfolio: the company’s commitment to dividends. Berkshire Hathaway has received an average of about $775 million in Apple dividends annually since 2018.
Tech companies aren’t known to pay huge dividends because they invest a lot in growth, so Apple’s dividend isn’t the biggest around. But the company has steadily paid one since 2012. And with a dividend of $1 per share per year, for a dividend yield of 0.4%, this is an attractive part of the complete package.
All of this leads me to predict that Apple, like Coca-Cola, will be a fixture in Berkshire Hathaway’s portfolio. And its strong earnings track record, strong closing price and dividend policy make this tech stock a great addition to any portfolio that needs the fantastic combination of growth and safety.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has one disclosure policy.
Prediction: This stock will be Warren Buffett’s next Coca-Cola was originally published by The Motley Fool