Investing in Apple with an annual return of 26%! Buffett's "most successful investment", Berkshire shareholders are starting to worry

Apple's largest ever 1.1 trillion shares buyback plan has raised doubts among retail investors: Is it wise to continue buying back shares with cash while iPhone sales continue to decline?

On Thursday local time, Apple's financial report showed a 10% year-on-year decline in iPhone sales in the first quarter, leading to a 4% drop in total revenue. However, at the same time, Apple announced an additional $110 billion share buyback, a 22% increase from the previous buyback size. Apple also raised its dividend by 4% to $0.25 per share. This buyback plan led to Apple's stock price having its best day since the end of 2022.

However, after Apple announced the plan, a Reddit user named cigarettesandwate, from the community forum known as the "retail investor headquarters," raised a question: Why didn't Buffett oppose Cook's high premium buyback of Apple shares?

This user compared Apple's current buyback behavior to Coca-Cola's similar actions during the dot-com bubble era, which Buffett later admitted was a mistake.

It is worth noting that not only retail investors, but also Berkshire Hathaway shareholders have begun to worry about Buffett's investment in Apple. At the end of last year, Buffett reduced his stake in Apple, although only by about 1%.

Apple remains Berkshire's largest publicly traded stock and one of Buffett's most successful investments to date. Buffett has long stated that buying Apple is not a bet on technology, but a bet on a company beloved by customers. He sees customer loyalty as Apple's biggest moat.

But with Apple's performance continuing to decline, Buffett may face questions like this at the later Berkshire Hathaway shareholder meeting:

Is Apple's moat drying up? Especially as this tech giant faces increasing regulatory pressure.

Apple's total revenue has declined in 5 out of the past 6 quarters, and Cook expects single-digit revenue growth in the second quarter. Even after the significant rebound on Thursday, Apple's stock price is still down 3.8% year-to-date, compared to a 7.5% increase in the S&P 500 index.

Why doesn't Buffett oppose Apple's share buyback amid continued weak iPhone sales?

Some believe that Buffett may not want to publicly criticize Apple as it could harm his own investment in Apple.

Others believe that stopping buybacks would indicate that Apple's stock price is too high, and shareholders would demand the company to use cash in other ways Some believe that this strategy may be attributed to Buffett's advice. In 2016, Cook said in a media interview:

When I was weighing how to return cash to shareholders, I thought about who could provide us with impartial advice without any bias? So I called Warren Buffett, I think he is the most suitable candidate.

Buffett has praised Apple's ability to return billions of dollars to shareholders each year through stock buybacks and dividends.

By the end of 2023, Berkshire Hathaway owned about 6% of Apple, with the shares valued at $174 billion, accounting for about 40% of the group's total market value. This stake is approximately four times the size of Berkshire's second-largest public holding, Bank of America. Berkshire has become the second-largest shareholder of Apple, second only to Vanguard Group.

Betting on Apple has brought Buffett substantial returns. Buffett stated in 2022 that Berkshire's cost of holding Apple shares was only $31 billion. Since the beginning of 2016, Berkshire's investment has grown by nearly 620%.

According to Cheviot Value Management, Berkshire's annualized return from Apple (including dividends) exceeds 26%, surpassing the S&P 500 index's 12.9% increase over the same period.

Buffett's long-standing love for Apple is not based on technology. He sees the loyalty of users to Apple products and views the iPhone as an extraordinary product that allows customers to consume within the Apple ecosystem. He considers user loyalty as Apple's moat.

At last year's shareholder meeting, Buffett said:

Apple's stance towards consumers is that they pay $1,500 or any other price to buy a phone, and these people pay $35,000 to buy a second car.

If they have to choose between a second car and an iPhone, they will give up the second car!

However, Apple's total revenue has declined year-on-year in five out of six quarters. Does this indicate that this moat is drying up?

Cook revealed that overall sales for the quarter in June may grow by a low single-digit percentage, with market expectations at $832.3 billion. Apple's revenue in the second quarter of 2023 fell by 1% year-on-year to $818 billion.

Berkshire shareholders have many concerns: weak sales, antitrust issues...

Analysis shows that Berkshire shareholders have several concerns about Buffett's heavy investment in Apple stocks:

Apple is currently facing challenges such as falling stock prices, slowing sales in the Chinese market, lagging behind in the competition of artificial intelligence, etc., which increases the risk of investing in Apple.

Apple's stock price is no longer cheap, making it harder to find suitable buying opportunities than before.

Antitrust agencies in several European and American countries have launched investigations or lawsuits against Apple. Once found to have significant violations, Apple may face hefty fines or even be required to make significant changes to its business model, which will seriously affect its most profitable business income. Buffett has not publicly expressed his views on regulatory obstacles Generally speaking, it is difficult for technology companies to maintain a leading position in the long term, and Apple's current products may be replaced in fifteen years.

Furthermore, Apple lacks physical assets as a safety net, which poses higher risks and is not quite in line with Buffett's consistent investment style. Buffett has been cautious about tech stocks in the past, and his investment in IBM has resulted in losses.

Nevertheless, Berkshire Hathaway is currently struggling to find a better investment channel than Apple to utilize its huge cash reserves, which may be the main reason why Buffett is not selling Apple shares at the moment