Prediction: This Stock Will Become Warren Buffett’s Next Coca-Cola

Coca-Cola (NYSE:KO) isn’t the largest holding in Warren Buffett’s portfolio, but it’s one of the billionaire’s favorites — and will likely remain at its current level.

Buffett began buying shares of the world’s largest soft drink maker in 1987 and continued to add to his position over a seven-year period. Those 400 million shares haven’t budged since. In fact, he’s described his holding on to Coca-Cola as “Rip Van Winkle’s dream.”

Buffett, who is known for drinking several cans of Coca-Cola a day, clearly loves the product, and the fact that others do too. This brand strength gives the company a moat, or competitive advantage, a key element Buffett looks for in a company. The beverage giant has also grown profits over time and rewarded investors with dividends.

For these reasons, Coca-Cola is likely to maintain its position in the market Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) portfolio. But it may not be the only stock that has earned Buffett’s enduring loyalty. In fact, the stock he just trimmed his position in could join Coke as one of Berkshire Hathaway’s “forever” stocks. In my opinion, this stock will become Buffett’s next Coca-Cola…

Image source: The Motley Fool.

Buffett recently sold some of the company’s shares

What stock am I talking about? Well, this is another company that is a household name, albeit one that operates in the tech industry, not the beverage sector: Apple (NASDAQ:AAPL).

But wait a minute, you might say: Buffett sold part of his shares of the iPhone maker in the second quarter. Isn’t that a bad sign?

Not necessarily. At Berkshire Hathaway’s annual meeting in May, Buffett signaled that his sale of Apple was tied to the current 21% capital gains tax rate, not a loss of confidence in the company. He expects the tax rate to rise, given the current size of the federal deficit. Even counting the sale of his 49% position in Apple, Buffett said it was “extremely likely” that it would be Berkshire’s largest common stock holding by year’s end.

The recent sale of Apple reduces the holding to 400 million shares. Sound familiar? That’s the same number of shares Berkshire owns in Coca-Cola. It’s an interesting detail, of course, but I’m not basing my prediction on it. I have a stronger argument for why Buffett might see Apple as his next Coca-Cola.

“Brilliant CEO”

And that has to do with his confidence in the company’s management and its solid financial performance. In Buffett’s 2021 letter to shareholders, he called Tim Cook a “brilliant CEO” of Apple and praised his decision to buy back Apple shares. Share buybacks increase ownership for current holders without them paying a dime.

With these buybacks, Berkshire increased its stake from 5.2% of Apple shares in 2018, when it completed the share purchase, to 5.4% in 2020. Berkshire began buying Apple shares in 2016.

Cook’s expertise has led Apple to double-digit profit growth for the past five years. Like Coca-Cola, Apple has a significant lead, and iPhone users flock to the company whenever a new version comes out. Last year, for the first time, Apple had seven top-selling smartphones on Counterpoint, a technology market research firm.

“A Permanent Moat”

“A truly great business must have a durable ‘moat’ that protects excellent returns on invested capital,” Buffett wrote in his 2007 letter to shareholders, emphasizing the importance of this principle in choosing investments.

Finally, there’s one more thing about Apple that could help it become the “next Coca-Cola” in Berkshire Hathaway’s portfolio: the company’s commitment to paying dividends. Berkshire Hathaway has paid an average of about $775 million per year in dividends to Apple since 2018.

Tech companies aren’t known for paying out huge dividends because they invest heavily in growth, so Apple’s dividend isn’t the biggest on the market. But the company has been paying it consistently since 2012. And at $1 a year per share, which translates to a dividend yield of 0.4%, it’s an attractive part of the package.

All of this leads me to predict that, like Coca-Cola, Apple will be a permanent fixture in Berkshire Hathaway’s portfolio. And with its strong earnings history, strong moat, and dividend policy, this tech stock is a great addition to any portfolio that needs a fantastic combination of growth and safety.

Is it worth investing $1000 in Apple now?

Before you buy Apple stock, consider the following:

This Motley Fool Stock Advisor a team of analysts have just identified what they believe is Top 10 Stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could deliver monster gains in the years to come.

Consider when Nvidia We created this list on April 15, 2005. If you invested $1,000 at the time of our recommendation, you would have $729,857!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio-building tips, regular analyst updates, and two new stock picks each month. Stock Advisor the service has more than four times S&P 500 return since 2002*.

See 10 actions »

*Stock Advisor Returns as of September 9, 2024

Adria Cimino has no position in any stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.