Prediction: This stock will become Warren Buffett’s next Coke

Coca cola (K.O 0.94%) it’s not the largest position in Warren Buffett’s portfolio, but it’s one of the billionaire’s favorites — and one that’s likely to stay there at current levels.

Buffett began buying shares in the world’s largest soft drink maker in 1987 and continued to grow the position over a seven-year period. The 400 million shares haven’t budged since. In fact, he even described his fondness for Coke as “a Rip Van Winkle sleep.”

Buffett, known to drink several cans of Coke a day, clearly likes the product, and he also likes that others feel the same way. This brand strength gives the company a competitive edge or edge, a key element that Buffett looks for in a company. Additionally, the beverage giant has grown earnings over time and rewards investors with dividends.

For these reasons, Coca-Cola is likely to stay here in its position in Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.72%) portfolio. But it might not be the only stock earning Buffett’s lifelong loyalty. In fact, a stock he just reduced his position in could join Coca-Cola as one of Berkshire Hathaway’s “forever” holdings. My prediction is that this stock will become Buffett’s next Coke…

Image source: The Motley Fool.

Buffett recently sold some shares of this stock

So what stock am I talking about? Well, there’s another company that’s a household name, although it operates in the technology industry rather than the beverage sector: Apple (AAPL -0.12%).

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

Not necessarily. At Berkshire Hathaway’s annual meeting in May, Buffett signaled that his Apple sell-off was related to locking in the current 21 percent capital gains tax rate and not a loss of confidence in the company. He expects the tax rate to rise given the current size of the federal deficit. Even accounting for the sale of 49 percent of his Apple position, Buffett said it is “extremely likely” that at the end of the year it will be the largest holding of Berkshire’s common stock.

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

A “Brilliant CEO”

And that has to do with his confidence in how the company is run and its solid earnings record. In Buffett’s 2021 shareholder letter, he referred to Tim Cook as Apple’s “brilliant CEO” and praised his decision to buy back Apple stock. Share buybacks increase the ownership of current holders without them paying a dime.

Those buybacks have helped Berkshire grow its stake in Apple from 5.2 percent in 2018, when it completed its share purchases, to 5.4 percent by 2020. Berkshire began buying Apple shares yet from 2016.

Cook’s expertise has also guided Apple to double-digit revenue growth over the past five years. And like Coca-Cola, Apple has a significant moat, with iPhone users flocking to the company every time a new version is released. Last year, for the first time, Apple claimed the top seven spots on the list of best-selling smartphones compiled by Counterpoint, a technology market research firm.

A “Sustainable Ditch”

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

Finally, one more thing about Apple that could help it become the “second Coke” in Berkshire Hathaway’s portfolio: the company’s commitment to dividends. Berkshire Hathaway averaged about $775 million annually in Apple dividends as of 2018.

Tech companies aren’t known for paying outlandish dividends because they invest a lot back into growth, so Apple’s dividend isn’t the biggest on the block. But the company has consistently paid one since 2012. And at a dollar a share annually, for a dividend yield of 0.4%, it’s an attractive part of the total package.

All of which prompts 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 the fantastic combination of growth and safety.