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Why does it make sense that Apple is the largest company owned by Warren Buffett

Investors don’t seem to be getting enough of Warren Buffett and his investment strategy. After all, the Oracle of Omaha is one of the wealthiest investors of all time, as evidenced by the success of his multinational holding company, Berkshire Hathaway (BRK.A -0.70%)(BRK.B -0.75%). If you take a look at Berkshire’s investment portfolio, you’ll notice that roughly 40% of its value is in just one stock, apple (AAPL -0.03%). Berkshire’s Apple stock is worth about $128 billion.

So, why does Buffett love Apple so much? Here are three reasons why Apple is Berkshire’s largest company.

A person checks financial information on a smartphone while taking notes on paper.

Image source: Getty Images.

1. Consistent and predictable financial

Apple has one of the most resilient companies in the world and this helps it shine today. While several major tech companies have posted weaker-than-expected quarterly reports recently — due to a combination of macro factors and the company’s own headwinds — Apple has been operating at full throttle in its last quarter.

The company’s total sales of $97.3 billion rose 8.6% year over year and beat Wall Street estimates by 3.5%, and its earnings of $1.52 per share closed out, beating expectations by 6.3%. While the 6.6% expansion in its core products business, such as iPhone, iPad, Mac, and wearables and home and accessories, was solid, it was the company’s services segment that wore a crown for the most robust growth. The services category rose 17% to a record $19.8 billion, serving as the primary catalyst for growth with both significant growth and large margins.

“These impressive results reflect the impact of our continued investment in improving and expanding our portfolio of services and the positive momentum we see on many fronts,” said CFO Luca Maestri during the quarterly call with analysts. The Services segment includes the App Store, iTunes, Apple Pay, iCloud and AppleCare.

For the full fiscal year 2022, analysts are modeling a $394.2 billion top line and $6.15 earnings per share, which translates to 8% and 10% year-over-year growth, respectively. Apple’s popular product business and growing service sector position the tech giant well.

2. The ability to generate cash

Buffett once said, “Cash is work as oxygen is to the individual.” Apple certainly epitomizes that. The company has a cash position of $28.1 billion and is practically a money printing machine. In the past twelve months, it generated $105.8 billion in free cash flow (FCF), and the three-year compound annual growth rate is 13%.

Having a large cash position is beneficial for several reasons. First, it enables the company to fulfill all its obligations and provides security in case of unforeseen economic events.

Equally important, it allows the company to reward shareholders through dividends and share buybacks and allows reinvestment in the business. Recently, Apple’s board of directors approved a 5% increase in the quarterly dividend, to $0.23 per share — the stock makes less than 1% at its current price — and authorized a $90 billion increase in the company’s stock buyback plan. In short, a large monetary position provides the peak of stability and financial flexibility, two main characteristics that Buffett looks for in stocks.

3. Wide economic moat and brand recognition

Brand strength is often a key driver of a company’s success. according to ForbesApple is the most valuable brand in the world. The level of appreciation helped Apple generate $386 billion in 12-month trailing revenue as of late March and capture more than 50% of the US smartphone market last year.

Today, the market value of the $2.3 trillion iPhone is equivalent to 11% of the US’s 2020 GDP and on par with the UK’s. Apple locks users in its ecosystem and has a strong economic moat. She has created a strong love for her products and routinely introduces new ones. This leads to more predictability for investors and a very durable job for Apple, regardless of the economic climate. For Buffett, an investor looking for companies with wide, long-standing moats, Apple is the perfect stock to sit at the top of a Berkshire portfolio.