The harmony of Apple’s software, services and hardware all drove another quarterly record for Mac, iPhone and services. Apple has created one of the world’s greatest brands, which has not escaped the attention of popular investor Warren Buffett.

What makes the stock such a great investment is the management team’s discipline in allocating a huge mountain of cash to help reward its shareholders, while also plowing more money back into the heart of the company’s competitive advantage.

The value in Apple’s share repurchases

At the end of the quarter, Apple had a net cash position of around $80 billion on its balance sheets. But free cash flow over the past four quarters hit a staggering $101 billion. The company is returning a large amount of that excess cash to its shareholders — it has returned $14 billion in dividends over the past year. But traders should pay just as much attention to the company’s share repurchases, which are increasing shareholder returns significantly by shrinking the share count.

Over the past five years, Apple’s share repurchases have decreased the company’s avg. diluted shares outstanding by almost 20%. Apple had around 22 billion shares that were outstanding in year 2017. It finished year 2021 with about 16.86 billion. This means Apple’s shareholders who have held the same number of shares during that time have had their percentage of ownership rise proportionally as the total pie got smaller.

Warren Buffett has applauded Apple’s share repurchases in a letter last year to Berkshire Hathaway shareholders. As of January 3, 2022, Berkshire owns 5.56% of Apple.

“The math of the repurchases grinds away very slowly but can be powerful with the right amount of time. The process provides a simple way for traders to own an ever-growing portion of exceptional companies,” says Warren Buffett.

Reinvesting in the core

Apple’s total revenue has increased by 11% year over year in Q1 of year 2022 (which ended December 25). While Apple is not producing breakthrough new products every three years like it was when it was under Steve Jobs, growing free cash flow is allowing the company to continue improving its existing services and products to drive record revenue.

There will most likely be more blockbuster hardware products released at some point in the future. After all, Apple has spent $23 billion on its research and development on a trailing 1-year basis. But CEO Tim Cook has explained how Apple is continuing to invest in bolstering its ecosystem through the intersection of software, services and hardware. As he put it, “That is where the magic really happens.”

It is the stickiness of Apple’s services and hardware that have led Buffett to initially invest $36 billion in Apple’s stock. The company’s growing cash flow means it could make its devices even stickier.

As Warren Buffett noted in his letter, Apple is a great business that is worth holding for the long term.

Author: Blake Ambrose

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