Warren Buffett’s newest 13F filings were recently released. The Oracle of Omaha’s largest single stock holding continues to be Apple (AAPL) at 23.74% of his portfolio. This is his second large technology company investment. The first came in 2011.

That’s when Warren Buffett began building a position in IBM (IBM). Today, IBM is no longer Berkshire Hathaway’s (BRK-A) portfolio as Warren Buffett came to the conclusion that he had misjudged the company’s future prospects in the cloud computing business due to underestimating the strength of its competitors.

Buffett has famously (prior to 2011) avoided tech stocks. When asked in the late 1990’s if he was (at the time) investing in technology stocks, Warren Buffett said the following:

“The answer is no, and it’s probably unfortunate. I don’t know what that world will look like in 10 years, and I don’t want to play in a game where the other guy has an advantage over me.”

Buffett appears to have studied up on technology stocks since the late 1990’s. It is interesting to note that he only invested in IBM when it:

1. Traded at a low price-to-earnings multiple
2. Paid a dividend
3. Heavily engaged in share buybacks

His investment in Apple follows the same pattern.

Did Buffett Really Invest in Apple?

There’s no doubt that Buffett was behind the IBM investment. It made up nearly 10% of his portfolio at one point.

In Buffett’s 2015 annual report, he gave an update about the control both Todd Combs and Ted Weschler have over Berkshire’s (BRK-B) portfolio:

“Todd (Combs) and Ted Weschler are primarily investment managers – they each handle about $9 billion for us – both of them cheerfully and ably add major value to Berkshire in other ways as well. Hiring these two was one of my best moves.”

Since the initial news of Buffett’s investment in Apple broke, he has confirmed that his investment managers did indeed initiate Berkshire’s position in the company.

However, over time, Buffett has directed much larger purchases in the company as he has become more familiar and comfortable with the business and its future prospects as a “big strong consumer products company.”

As a result, it now occupies nearly a quarter of Berkshire’s stock portfolio.

What Is Strange About Buffett’s Apple Investment

If you look at Warren Buffett’s portfolio, you will see it is filled with high quality businesses with long histories of success.

These are businesses that have proven they can grow and prosper over the long-run. The founding date of many of his top holdings are discussed below:

Kraft-Heinz Company (KHC): The company was recently created through a merger. Kraft traces its history back to the late 1800’s and early 1900’s:

• L. Kraft started his cheese business in 1903
• W. Post started Postum Cereal in 1895
• Oscar Meyer started his meat business in 1883

H.J. Heinz Company was founded in 1869 by its namesake, Henry John Heinz.Kraft-Heinz has not lived up to expectations as recent results have shown, but it did fit the ‘boring consumer staples’ business mold at the time Buffett invested.

Wells Fargo (WFC): Henry Wells & William Fargo founded Wells Fargo in 1852.

Coca-Cola (KO): The first Coca-Cola was created in 1886 by Dr. John Pemberton in Atlanta, Georgia.

American Express (AXP): American Express is the oldest of the five, tracing its history all the way back to 1850.

Looking at these holdings, it is clear Warren Buffett looks for a very long history of sustained success. This is where Apple does not fit the traditional Buffett stock.

Apple was founded in 1976. The company does not have a sustained history of success. In 1997, Apple was bailed out of bankruptcy by a $150 million investment from Microsoft (MSFT).

Apple did not become the Apple we know today until 2001, when the first iPod was released. The iPod’s success launched the iPhone, iPad, iTunes, and Apple Watch.

Today, Apple is one of the largest corporations in the world based on both market cap and earnings:

• $933 billion market cap
• $55.7 billion (!) in net income over the last 12 months

But Apple’s success is recent and came quickly. It does not match the slow gradual growth of Buffett’s other large holdings.

The fact that it does not fit the character of many of Buffett’s other large holdings illustrates just how much confidence Buffett has in their long-term staying power as a consumer products giant.

Apple Is A High Quality Shareholder Friendly Business

We look for high quality dividend growth stocks suitable for long-term holding. There’s no doubt Apple is a high quality dividend growth stock today.

Apple reinstated its dividend in 2012 (the company hadn’t paid a dividend since 1995). The company’s dividend history is shown below:

What’s more, the company has repurchased about 25% of its outstanding shares over the past six years, with the pace accelerating to about 5% float reduction per year.

Apple currently has a dividend yield of 1.5%. The company’s dividend yield combined with its share repurchases gives it a shareholder yield of around 6.5% – which is quite high for such a “big and strong” company. There’s no doubt Apple is a shareholder friendly company.

Apple’s ability to generate cash – $56 billion in earnings over the last 12 months – makes it very clear the company has a strong brand based competitive advantage.

The company’s products and brand represents quality. Apple’s products are used and greatly improve the lives of 100’s of millions of people around the world every day.

What isn’t clear about Apple is the sustainability of its competitive advantage.

Will we be using credit (American Express), eating ketchup (Kraft-Heinz), and drinking beverages (Coca-Cola) in 10 years? With a very high degree of certainty, you can say yes to all of the above.

Will Apple still be the world’s dominant smart phone company in 10 years? What about 20 years? Will we even use smart phones in 20 years? The answer to those questions are much less certain.

That’s where the uncertainty in an Apple investment lies. It’s not whether or not the company is shareholder friendly and has a strong competitive advantage today (it most certainly does). It is about whether that competitive advantage is durable and sustainable.

Apple’s Valuation & Final Thoughts

Apple’s stock currently trades for a price-to-forward-earnings ratio of 17.6 which is slightly above our fair value estimate, implying that the broader market feels quite confident in Apple’s staying power as a consumer products company.

This is in part because the fears outlined in this article are just as applicable to Netflix (NFLX) as they are to Apple, yet Apple has a much stronger balance sheet than Netflix. Furthermore, Netflix’s forward price-to-earnings ratio is a whopping 92.6.

While it is true that Netflix’s industry is currently growing at a much faster clip than Apple’s mature core cell phone business, Netflix also has far stronger up-and-coming competition from the likes of Amazon (AMZN) and Disney (DIS) in the streaming space. When combined with the vast disparities in their balance sheets, Apples stock looks to be a far better bet today. There’s very little doubt the company’s brand based competitive advantage will be sustained over the next several years.

At a price-to-earnings ratio of 17.6 with strong dividend growth prospects for the foreseeable future, Apple isn’t cheap, but it still makes for a solid conservative long-term holding in a portfolio. Still, its paltry 1.5% yield, slow growth, and significant exposure to the trade war between the U.S. and China keep us from viewing it as a buy right.

Is Apple a core position for the long-term dividend growth investors? Yes, if already held in a portfolio with significant unrealized capital gains.

Does Apple offer above-average risk-adjusted return potential over the next several years? Not in our analysis.