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Warren Buffett Has Bought Apple Stock: Should You Buy AAPL?

In a regulatory filing, Berkshire Hathaway BRK.A BRK.B disclosed that it had bought up 9.81 million shares of Apple Inc. AAPL during the first quarter of 2016.  Berkshire’s stake is worth over $900 million right now.

The news is intriguing for shareholders considering an investment in Apple.  Warren Buffett is known for buying companies when he feels like they are cheaper than they should be.  He is also known for his long-term investing style.  Apple shares are down 10.7% year-to-date, so did he see a long term bargain opportunity?

Berkshire Hathaway purchased its stake in Apple at an average of $109 per stock.  This represents a 13.7% premium on the current share price.  Of course, this means that Berkshire’s position on Apple is in the red right now.  Should you side with Warren Buffett’s view of the Cupertino tech giant and buy AAPL stock for a much lower price than he bought them?  Consider the metrics below.

Valuation

For a cash-rich company, Apple’s stock looks pretty attractive across fundamental valuation metrics.  The company has a debt-to-capital of 34.7%, and it isn’t financially stressed by any means.  The tech giant trades at a forward PE of just 10.77, which is pretty cheap, especially for a company with cash flows as strong as Apple’s.  AAPL stock has a low PEG of 1.1, so its current share price is not bloated when factoring growth expectations over the longer term (3-5 years).

Apple has an EV/EBITDA of 6.67.  This metric is very useful for analysts on Wall Street, and it is among the most important measures for evaluating M&A transactions.  Apple’s EV/EBITDA is far lower than the average seen among companies in the Fortune 500, so Mr. Buffett may have found a good long term bargain in Apple.

Dividend Strength

People don’t start thinking about dividends when they hear about Apple, but maybe they should.  In Apple’s most recent earnings report, the company announced a raise in its quarterly dividend.  The company now doles out $0.57 per share every quarter.  Since 2014, Apple’s quarterly dividend has grown by 23.53%. 

This growth is significant, and it has impacted the company’s cash payout considerably.  Apple’s current dividend yield is a solid 2.4%.  It isn’t a particularly attractive yield right now, but it is important to look at the rate which Apple has been increasing its quarterly dividend.  Since November of 2012, AAPL’s quarterly dividend has grown by 50%.  The company has raised its dividend every year over the last four years.  Best of all, the corporation’s current cash flows are already high enough to support more dividend growth, so the company should look pretty promising to long term income investors.

Bottom Line

Apple has its fair share of growth issues.  This doesn’t really change the fact that people still place a high value on its premium-priced products.  The company heavily relies on its phone to drive sales, but the iPhone continues to set the bar for smart phones.  Apple doesn’t look like it’s going to lose its brand status any time soon. 

The company is also investing a lot of money in several ventures such as an Uber competitor, virtual reality, autonomous driving, mobile payments, music, and more.  Apple acknowledges its maturity by increasing its dividend, but its heavy investing activity proves that it has not given up on its growth story just yet.

That being said, Apple shares may stand to lose some weight over the short term.  It currently holds a Zacks Rank #4 (Sell), and 12 analysts have revised their quarterly earnings expectations lower over the last 30 days.  Things can get chippy for Apple’s share price in the near future if it misses earnings expectations next quarter.  If you’re Warren Buffett though, you aren’t too worried about what will happen in the short term, since you’re most likely in it for the long haul.

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APPLE INC (AAPL): Free Stock Analysis Report
 
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
 
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