Warren Buffett hasn’t found many attractive opportunities in the stock market recently.
Over the past seven quarters, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has consistently sold more stocks than it has purchased.
Last quarter, however, marked a milestone as Buffett executed the largest stock sale in Berkshire’s history.
Berkshire unloaded 389,368,450 shares of Apple (NASDAQ: AAPL), valued at approximately $88 billion at current prices.
This sale likely fetched less than today’s value, as Apple’s shares traded below their current level throughout Q2 2024.
Apple's stock currently trades around $226.84 (as of this writing), with a 52-week range between $164.08 and $237.23.
Sources: Yahoo!Finance
The tech giant has maintained its market cap above $2.8 trillion, and Apple’s year-to-date performance remains strong, up nearly 17.82%.
This recent sale marks the third consecutive quarter that Buffett has trimmed Berkshire’s Apple holdings.
The latest move dwarfs the previous sales—10 million shares in Q4 2023 and 116 million shares in Q1 2024—by a significant margin.
During Berkshire’s annual shareholder meeting, Buffett pointed out that selling highly appreciated assets like Apple allows them to capitalize on the benefits of the current tax code.
However, this year’s tax bill for Berkshire will still be substantial.
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Financial Highlights and Tax Impact Analysis
Apple’s shares traded between $165 and $216 during Q2 2024, with an average closing price of $186.49.
If we assume that Buffett’s sale occurred at the average price, Berkshire would have generated approximately $72.6 billion in proceeds.
Berkshire acquired the majority of its Apple position between 2016 and 2018, at an average cost of $36.51 per share (adjusted for splits).
If all the shares sold last quarter originated from those purchases, Berkshire would have realized a gain of approximately $150 per share on the 389 million shares sold.
This equates to a total gain of around $58.4 billion.
In addition, Berkshire’s earlier sale in Q1 2024, when Apple’s stock traded at an average of $181.83, likely resulted in a gain of $16.9 billion.
Combined, Berkshire’s gains from selling Apple stock in the first half of 2024 total roughly $75 billion.
At the current federal corporate tax rate of 21%, Berkshire would owe approximately $15.8 billion in federal taxes.
Nebraska’s corporate tax rate of 6.5% could add another $4.9 billion to the bill.
The 2017 tax reform, which reduced the corporate tax rate from 35% to 21%, continues to save Berkshire shareholders significant sums.
Under the old tax code, this sale would have cost an additional $10.5 billion.
However, with President Biden proposing a 28% corporate tax rate once the 2017 tax cuts expire next year, this scenario could change in the future.
Impact on Berkshire Shareholders
Berkshire Hathaway shareholders may be concerned about how this substantial tax obligation could affect the company’s earnings.
The good news is that Berkshire accounts for tax liabilities on unrealized capital gains each quarter as deferred tax expenses.
In simple terms, much of the tax on Apple’s gains has already been accounted for in previous earnings reports.
This is why investors didn’t witness a sharp increase in tax expenses in Berkshire’s Q2 report.
As a result, the stock sale won’t significantly impact reported earnings, apart from the potential missed gains if Apple’s stock continues to rise.
However, the sale will lead to a tangible cash outflow, which management has warned will affect cash flows.
“Operating cash flows over the remainder of 2024 will be reduced by significant income tax payments derived from taxable gains on disposals of equity securities,” Berkshire’s management noted in their Q2 earnings release.
Despite the hefty tax bill, Berkshire remains in a solid financial position.
As of June 2024, the company held $277 billion in cash and short-term Treasury bills.
A $20.7 billion tax obligation is manageable for Buffett, especially given the limited investment opportunities currently available.
Final Thought: Should You Invest in Berkshire Hathaway Right Now?
Berkshire Hathaway is still a financial giant with solid fundamentals and plenty of cash on hand.
However, Buffett’s recent massive stock sale and the tax hit suggest he's being cautious about current market conditions.
For potential investors, it’s essential to think about the company’s current strategy and how tax law changes might affect its future.
Market conditions are always shifting, so take the time to stay informed and make sure your investment decisions align with your own goals.
In the end, smart investing is about being patient, informed, and sticking to your financial plan.
Thank you for joining us on this journey. Remember, the best investment you can make is in yourself. Happy investing!
Together, BuildWealthWise
ChuWei
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