Insights

Want $1,000 in Passive Income? Buy 1,084 Shares of This Warren Buffett Stock

Apple (NASDAQ: AAPL) accounts for 43% of Warren Buffett’s holdings through Berkshire Hathaway, which makes it his largest position by a wide margin. Currently, Apple’s dividend yield sits at just 0.71%, but an investment of $141,000 — or 1,084 shares at the current price — would still generate $1,000 in passive income each year.

More importantly, investors have good reason to believe the quarterly payout will continue to grow. Additionally, Apple should benefit from several catalysts in the coming years, which leaves room for share-price appreciation.

Here’s why this Buffett stock is a buy.

The world’s most valuable brand

In 2022, Brand Finance and Kantar recognized Apple as the world’s most valuable brand, and both reports cited its diverse offerings of hardware and services as a key differentiator. Unlike Android devices, Apple devices run closed-source operating systems, like iOS on the iPhone, creating a user experience that can’t be duplicated by third-party vendors. To that end, the company commands significant pricing power.

In the first quarter, Apple ranked second in global smartphone shipments, capturing 18% market share, but it easily took the top spot in the U.S., with 50% market share.

Apple has also leveraged its brand authority to build consumer loyalty across its lineup of Macs, iPads, and Wearables. In fact, its installed base of active devices hit a new all-time high across all majority product categories and geographies in the last quarter, according to CFO Luca Maestri. That positions Apple’s burgeoning services business for rapid growth.

Accelerating profitability

In recent years, Apple has expanded the scope of its services business to more effectively monetize its massive user base. Services revenue soared 17% in the most recent quarter, easily outpacing the 7% growth in product revenue. Currently, advertising, cloud storage, and App Store sales are the main contributors, but the segment also includes payment services like Apple Pay and the Apple Card, and subscription services like Apple TV+ and Apple Fitness+.

Apple’s focus on services is about more than growing the top line. Device sales tend to be cyclical, rising and falling based on product release cycles, but services revenue is more consistent and comes with much higher margins. In fact, the gross margin on Apple services was 72.6% in the most recent quarter, nearly double the 36.4% gross margin on its other products.

To that end, Apple is becoming increasingly profitable.

Metric

Q2 2019

Q2 2022

CAGR

Revenue (TTM)

$259 billion

$386 billion

14%

Net income (TTM)

$57 billion

$102 billion

21%

Data source: YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate.

Apple has spent over $200 billion on share repurchases in the last three years, reducing the number of outstanding shares by nearly 13%. As a result, diluted earnings per share has grown at 27% per year over that time frame, outpacing growth in net income.

Similarly, Apple has upped its dividend payout at an annualized pace of nearly 8% over the last five years, returning even more capital to shareholders.

Ripe for the picking

Apple has demonstrated its capacity for innovation on several occasions, and the company could deliver another game-changing device or two in the coming years. Specifically, a report from Bloomberg suggests that Apple could launch a mixed reality headset in 2023, followed by augmented reality glasses in 2024 or 2025.

Currently, Apple stock trades at 21.1 times earnings. That may not be cheap, but it’s cheaper than its three-year average of 27.4 times sales. More importantly, Apple is aggressively repurchasing shares, and its services business is expanding rapidly. Those trends should keep its bottom line growing quickly for years to come.

As a final thought, Warren Buffett is undoubtedly one of the greatest investors of our time, and his massive stake in Apple suggests high conviction. That’s why this dividend-paying growth stock is a smart buy.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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