Warren Buffett’s investment in Apple stock is particularly interesting because it is the only example of a Berkshire investment in a large-cap stock that is both repurchasing shares aggressively and does not require Berkshire to sell the stock at certain levels do to pragmatic legal reasons. For instance, he would never allow the Bank of America, Wells Fargo, or American Express holdings to ever eclipse more than 20% of each stock even as they repurchase their own shares because it would activate the “financial strength” (sometimes called “source of strength”) doctrine that requires the parent entity of a failed financial institution to pay for liabilities.
In other words, if you own 19.9999% of Bank of America or less, and the bank were to make some awful loans that resulted in $100 billion losses, the result would be a bankruptcy and the value of your shares would diminish to $0. That would be awful, but it would be even worse if you owned 20% or more of Bank of America, because then you (in whatever form you held the shares) would be liable for the $100 billion losses. Effectively, the “financial strength” doctrine abrogates the limited liability nature of a common stock investment for those who own more than 20% of a bank. That is why when you review the SEC disclosures for most financial institutions, the largest investor will maintain an ownership percentage around the 17-19% range. It is a deliberate limitation on ownership to avoid assuming unlimited liability.
Apple is a different story from Buffett’s typical investment in financial stocks that are aggressively repurchasing stocks. It doesn’t come with any limitation, except a duty to report in real-time any stock repurchases of Apple within several days once Berkshire owns 10% of the iPhone maker (note: the SEC has the authority to waive or delay this reporting provision for good cause, and Buffett’s desire to avoid copycats would almost certainly qualify as good cause).
This means that Berkshire essentially owns a stock that is repurchasing 5-7% of its stock each year while not facing the legal/pragmatic countervailing force to sell shares upon a certain point. This creates a situation where even the mere maintenance of the status quo will mean that Berkshire takes over an ever-increasing ownership position of the firm.
Specifically, there are 4.4 billion shares of Apple outstanding. Berkshire owns 248 million of them, or 5.7% of the company. If Apple continues to repurchase 5-6% of its shares outstanding each year, Berkshire will own 10% of the company ten years from now. It would own 17% of the company in twenty years. It would own 28% of the company in thirty years. It would take over 51% of the company in around 2060. This could come quicker if Apple accelerates its share repurchasers or the price trades in a low-range for a multi-year period, or it could be delayed if Apple issues stock as part of a large acquisition or the price trades at an elevated range for a multi-year period.
But the point is that the path in motion is going to lead to Berkshire gradually taking over the most lucrative technology company in the world. We saw this a little bit over the past thirty years with Berkshire’s ownership growing from 6% to 10% of Coca-Cola. But what is distinguishing is that Apple is repurchasing shares at 4x the rate of Coca-Cola and has typically traded at half the valuation of Coca-Cola, so the annual effectiveness of the Apple buyback as compared to Coca-Cola is actually eight-fold in terms of the annual percentage increase of Berkshire’s ownership.
The financial press is a little bit tardy on this one. They have reported on Buffett’s big investment in Apple, but they haven’t taken it as seriously as Buffett’s historic investments in Coca-Cola or Wells Fargo. That is a mistake. Berkshire is a $568 billion with $78 billion in Apple stock. Berkshire is roughly 14% “Apple” now. It eclipses even GEICO and National Indemnity in terms of what it means to Berkshire’s future.
We think of Apple, Amazon, Alphabet, and Microsoft as the “Big Tech” of the United States. But by investing so heavily into Apple, which in turn repurchases stock so heavily, and by virtue of being a long-term shareholder, Berkshire is positioning itself to be one of the “Big Five Tech Companies” through its ownership of an ever-increasing percentage of Apple’s share count. All the quaint stuff about brickmakers, small-town candy shops, newspapers, and old economy businesses are an important part of Berkshire’s history and will contribute somewhat to Berkshire’s future. But that image is now incomplete. Berkshire is Big Tech.