17: Apple Inc. (NASDAQ:AAPL)
Percent of Warren Buffett’s Portfolio: 0.8%
Dividend Yield: 2.5% Forward P/E Ratio: 10.9x (as of 5/16/16)
Sector: Technology Industry: Mini Computers
Dividend Growth Streak: 3 years
Apple Inc. (NASDAQ:AAPL) sells smartphones, tablets, computers, and an assortment of software, services, and accessories. iPhones have been the biggest driver of Apple’s growth and accounted for approximately 66% of the company’s total revenue last fiscal year. Apple computers (Macs) accounted for 11% of sales, and iPads made up another 10%. Software, services, and sales of other hardware such as iPods accounted for the remaining 13% of Apple’s revenue.
Warren Buffett acquired a $1 billion stake in Apple during the first quarter of 2016. Apple possesses several characteristics that Warren Buffett covets.
Most importantly, Apple owns the world’s most valuable brand. Billions of consumers and businesses alike are familiar with the Apple brand and know that it stands for quality. While consumer technologies and preferences are constantly evolving, Apple’s reputation is stellar and makes it easier for the company to enter new markets and sell to a large group of loyal followers.
Apple is also a free cash flow machine. Over the last decade, Apple’s free cash flow per share grew from 38 cents in fiscal year 2005 to $12.09 in fiscal year 2015. Throughout that period, Apple’s annual return on equity averaged an outstanding 30%.
Of course, history doesn’t repeat itself – especially in the tech sector. Much of Apple’s success was fueled by the mass adoption of smartphones. That market is now saturated, which has caused Apple’s growth to cool off and sent its stock down nearly 30% over the last year.
As a result, Buffett was able to buy in to the world’s most valuable brand for less than 11 times earnings. Buffett likely didn’t buy Apple for its smartphone franchise but rather for its future growth opportunities. As usual, he is looking out a number of years while the market is focusing on Apple’s next few quarters, which will likely remain challenged due to smartphone saturation.
From self-driving cars to virtual reality and a slew of other smart devices and software services yet to be invented, there are numerous paths Apple can pursue for growth.
Buffett generally prefers to invest in more predictable businesses that don’t have to reinvent themselves, which makes his bet on Apple Inc. (NASDAQ:AAPL) a bit surprising. However, he apparently believes that an iconic brand, a $55 billion pile of cash on the balance sheet, and a cheap valuation provide enough margin of safety to make Apple a safe bet over the next decade.
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18: U.S. Bancorp (NYSE:USB)
Percent of Warren Buffett’s Portfolio: 2.7%
Dividend Yield: 2.5% Forward P/E Ratio: 12.6x (as of 5/16/16)
Sector: Financials Industry: Major Regional Banks
Dividend Growth Streak: 5 years
U.S. Bancorp (NYSE:USB) was founded in 1863 and is the fifth biggest bank in the country as measured by assets. The company provides a full range of financial services, including lending, cash management, capital markets, and investment management services.
By business line, U.S. Bancorp generates 41% of its revenue from consumer and small business banking, 31% from payment services, 17% from whole banking and commercial real estate, and 11% from wealth management and securities services.
Overall, fee income accounted for 45% of total revenue in 2015. The company’s diversification makes it a more consistent and predictable business.
U.S. Bancorp has been one of Warren Buffett’s stock picks since before the financial crisis when he initiated a position in early 2007.
The company has a strong history of making high quality loans and remaining well capitalized relative to peers. As a matter of fact, U.S. Bancorp is the highest rated peer bank across all rating agencies when it comes to debt, providing it with funding and competitive advantages.
If Buffett owns the stock, it is safe to assume that USB’s culture is a conservative one that manages risk very carefully. This discipline shows up in USB’s profitability and efficiency metrics, which rank better than its peers.
Bank stocks look relatively cheap today because interest rates are expected to remain lower for longer. When rates are low, banks make less money on their lending operations.
Despite the tough environment for banks, USB’s loan portfolio has been growing at an annualized rate near 7% over the last decade.
The company’s loan book is also well-diversified and maintains little exposure to energy markets (1.2% of total exposure). Commercial loans are the company’s biggest lending category at 34% of average loans in 2015, followed by residential mortgages (27%) and commercial real estate (17%).
Warren Buffett owns U.S. Bancorp (NYSE:USB) because it is a high quality, conservatively managed business that has demonstrated an ability to achieve consistent growth. Over time, these types of companies should compound shareholders’ capital nicely.
