Here’s why Warren Buffett and Jim Cramer think Apple stock is the best

Warren Buffett sang Apple ‘s (AAPL) praises Saturday at Berkshire Hathaway ‘s annual shareholder meeting, saying the iPhone maker is a better company than any firm in the conglomerate’s vast portfolio. And, the legendary investor’s argument rests on the logic that’s similar to why Jim Cramer has long said Apple is an “own it, don’t trade it” stock. At the heart of Apple’s success — and what makes it such an incredible long-term investment — is its customer loyalty, according to the 92-year-old chairman and CEO of Berkshire, which first disclosed an Apple stake worth about $1 billion in May 2016. Berkshire’s Apple position has grown in size and value over the years and was worth about $151 billion, as of March 31. Buffett offered up a hypothetical scenario — perhaps using a little hyperbole — to express what he sees as the Apple magic. “Apple has a position with consumers where they’re paying $1,500, or whatever it may be, for a phone. And these same people pay $35,000 for having a second car,” the Oracle of Omaha said. “If they had to give up a second car or give up their iPhone, they’d give up their second car. It’s an extraordinary product.” AAPL .SPX mountain 2016-05-16 Apple’s stock performance versus the S & P 500 since May 16, 2016, the day Berkshire’s stake in the iPhone maker was first disclosed. Berkshire is a holding company with ownership of businesses all over the industry map including BNSF Railway, auto insurer Geico, chocolate maker See’s Candies and the Dairy Queen ice cream chain. Berkshire is also a major shareholder in publicly traded companies such as Coca-Cola (KO) and Chevron (CVX). The Apple stake stands out among them, Buffett said. “Our criteria for Apple is different than the other businesses we own. It just happens to be a better business than any we own,” said Buffett, who has also long complimented Apple CEO Tim Cook’s management acumen. “Our railway is a very good business,” Buffett added. “It’s not remotely as good as Apple’s business.” Buffett’s comments Saturday were “very bullish on Apple,” Jim said Monday during the Club’s “Morning Meeting.” In general, we find little to disagree with in Buffett’s admiration for Apple and are pleased to be fellow shareholders in the tech giant. Why the Club owns Apple To expand on it further, we wanted to highlight some specific Apple characteristics that support our desire to remain investors in the company in the years ahead. In addition to customer loyalty, these include its robust free cash flow generation, steady stock buybacks, and a rock-solid balance sheet. Apple also emphasizes generally accepted accounting principles (GAAP) in its quarterly report, offering a high-quality window into its financial health. This combination of characteristics puts Apple in rarefied investment air. Jim’s Charitable Trust, the portfolio we use for the Club, has had a position in Apple for more than a decade. While we don’t invest on autopilot and always study day-to-day updates in all our companies, Apple has so far continued to pass the own-it, don’t-trade-it test. 1. Brand loyalty and product ecosystem People love the iPhone and Apple’s other hardware products, such as Mac computers and Apple Watch. For example, customer satisfaction for the iPhone 14 stood at 98%, Apple CFO Luca Maestri said on the company’s February post-earnings conference call. He was citing a survey from 451 Research . For the Mac, Maestri said the survey found customer satisfaction of 96%. When the time comes to upgrade to a new version, history shows most Apple users stick with the brand. Apple’s base of installed devices has now topped 2 billion worldwide, an all-time record that reflects the customer satisfaction and loyalty Buffett values. Apple also is seeing traction in emerging markets like India and Indonesia where it has previously had little presence, creating an opportunity to grow the installed device number even further. This is where the idea of Apple’s ecosystem comes into play. The larger its hardware user base, the bigger the pool of potential subscribers to Apple services, which includes Apple Music, iCloud storage and fees from App Store purchases. Apple’s services revenue — which tends to be high margin and assigned a premium by investors — reached a record $20.9 billion in its March quarter. The number of accounts that made a Services transaction in the quarter also was an all-time high, according to Maestri. These company-branded services, which also include Apple Pay, add to the value and stickiness of owning an iPhone and other Apple devices. The software-hardware relationship creates an unmatched ecosystem that generates durable revenue streams for Apple. And, investors love to know that a company can consistently attract customers, new and old. 2. Free cash flow and buybacks Apple’s generates enormous sums of free cash flow, which is great for investors because that is money available to pay out dividends and repurchase stock . Free cash flow is generally defined as operating cash flow minus capital expenditures or cash spent on purchases of plant, property and equipment (PP & E). In its latest fiscal year, Apple recorded $111.4 billion in free cash flow, the most of any company in the S & P 500 , according to FactSet data. Perhaps even more telling, that figure was greater than the $99.8 billion in full-year net income, which, along with the strict adherence to GAAP reporting, speaks to the pure quality of the company’s earnings. Apple returns tons of that free cash flow to shareholders — much to Buffett and the Club’s satisfaction. Buffett especially loves Apple’s approach to buybacks because they enable Berkshire’s ownership percentage to increase without needing to purchase additional shares. Berkshire currently owns about 5.66% of the 15.82 billion Apple shares outstanding, according to FactSet. “If they [Apple] get that down to 15.25 billion, without us doing anything, we’ve got 6% [ownership],” Buffett said Saturday. Apple spent $89.4 billion on buybacks in its latest fiscal year, by far the most of S & P 500 constituent, according to FactSet. Last week, the iPhone maker’s board authorized an additional $90 billion share repurchase program. Apple also raised its quarterly dividend by a penny to 24 cents a share, for an annualized dividend yield of 0.55%, based on Monday’s share price around $173 each. 3. Balance sheet king Apple’s high-quality balance sheet is another reason the company is such an attractive investment over the long haul. Companies with strong balance sheets — generally meaning a lot more assets, including cash on hand, than liabilities — are well-positioned to ride out periods of economic instability. They can continue investing in their businesses without selling stock and diluting existing shareholders in the process, and/or raising debt at unfavorable terms that heighten interest expenses. For its part, Apple does sell bonds from time to time, including a five-part offering disclosed Monday in securities filings . However, both Apple’s financial health and top credit rating mean its borrowing can be done at favorable terms. Proceeds from Apple’s newest bond offering will be used for general corporate purposes, including buybacks, dividends and capital expenditures. Bottom line We’re with Buffett on Apple. It is among the highest-quality businesses and one worth owning for the long haul. The characteristics outlined above are why that’s the case. Of course, as Jim preaches, it’s important to be a buy-and-homework investor , not just a buy-and-hold strategy. In that homework process, we’ll always be on the lookout for new information that could change our investment approach to Apple. So far, the iPhone maker continues to pass the test. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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