Warren Buffett and Apple Stock: Drowning In Cash

Sometimes, the news item that the finance media fixates on is, in reality, the biggest news item of all. The news story that Buffett has bought an additional 75 million shares of Apple stock, supplementing the position of 166 million million shares that Berkshire Hathaway owned as of the annual report, bringing the total ownership position in the iPhone-maker to just a little over 241 million shares.

What I have not seen reported is how the immense Apple cash position relates to Buffett’s investment–i.e. Apple is sitting on $285 billion in cash while Apple is divided into just a tad over 5 billion shares outstanding, meaning that each share of Apple that you buy contains $57 in cash.

Buffett, who has expended a little over $30 billion of Berkshire’s resources to buy shares of Apple now worth around $45 billion, has “look-through” pro-rata portion of Apple’s cash position in the form of $14 billion–i.e. Of the $285 billion in Apple’s cash, $14 billion can be attributed to Buffett, who spent just slightly over twice that amount for his ownership stake.

As a theoretical concept, if Apple were to declare a one-time cash dividend to shareholders of all its cash reserves, Buffett would receive almost half the investment that he made in Apple to date. That is just…otherworldly, especially considering that he pulled this by investing in a big-name, well-known stock in the public markets that is accessible to you and me.

In real life, I expect the Apple dividend alone will come to be an important source of Berkshire’s funding for future acquisitions. Right now, there is $2 billion per month rolling into Berkshire’s Omaha headquarters. The Apple dividend alone will increase that figure by $58 million, giving Berkshire an additional 2% each month in unrestricted cash flows.

Over the next ten years, presuming 8% annual dividend growth, Berkshire will collect $10 billion in cash from Apple in dividends alone. By 2028, Berkshire should be collecting somewhere between $1.8 billion and $2.2 billion in Apple dividends.

It wouldn’t surprise me to see Buffett aim for 10% of the overall company, especially in light of his comments this morning that he would want to own the whole business outright. I imagine that, within a generation, it will come to represent up to a fifth of Berkshire’s overall value.

The massive strength that has been added to Berkshire’s earnings power over the past generation is nothing short of incredible. Twenty years ago, it was a well-capitalized collection of diverse assets that made it a novelty among conglomerates.

Now, Berkshire is taking over the whole world. There is cash pouring out everywhere. A review of the balance sheet just reveals cash generators here, cash generators there, and huge cash balance sheets throughout the subsidiaries. This supersized investment in Apple reinforces this point, both in terms of the total amount of cash generated from the dividends and the look-through pro-rata portion of cash on the Apple’s balance sheet that Berkshire’s ownership of 241 million of the 5 billion outstanding shares has come to represent. I have come to understand the investors who have made it their calling to load up on as much Berkshire as quickly as possible for as long as possible.