Warren Buffett Wants Stocks Like This and So Do I

It's not the normal course of business for me to lump myself in the same category as Berkshire Hathaway (NYSE: BRK-B  ) chief Warren Buffett. After all, he's a billionaire, the architect behind one of the greatest corporate success stories, and one of the (if not the) best investors of all time -- and I'm, well, not.

I did meet Buffett once at a Berkshire Hathaway annual meeting, but I'm not sure that counts for much unless we're playing "Six Degrees of Kevin Bacon" (I met Buffett at the Berkshire annual meeting, Buffett made a cameo in All My Children with Susan Lucci, Lucci hosted an episode of Saturday Night Live and did a skit with Phil Hartman, Hartman was in Coneheads with Dan Aykroyd, Aykroyd was in Blues Brothers with John Belushi, and Belushi was in Animal House with Kevin Bacon. Bam!).

But that's neither here nor there.

When it comes to investing, there's a heck of a lot that Buffett can do that I simply can't. For instance, back in the fear-filled days of 2008, he wrangled preferred stock yielding 10% from both Goldman Sachs and General Electric (NYSE: GE  ) . He's also been able to snatch up great privately held companies like See's Candies and swallow whole public companies such as Burlington Northern Santa Fe. Such is the benefit of a sterling reputation, an eye for bargains, and a massive balance sheet.

But when it comes to common stocks, I can go after the exact same shares that Buffett is buying for Berkshire. And when it comes to one stock in particular, I am most definitely on the same page as Buffett. It's Berkshire's largest stock holding. It's a staple among consumer staples. It is, of course, Coca-Cola (NYSE: KO  ) .

Why Coke?
There are plenty of reasons an investor might like Coke, and many of them can easily be seen on the financial statements. Over the past 20 years, the company practically quadrupled sales; it turns more than 20% of its revenue into profit, earns more than 30% on its equity, and absolutely gushes cash. For the dividend lovers out there, over the past decade the company has maintained annual dividend growth of nearly 10% while keeping a very conservative payout ratio.

Certainly those are among the reasons I'm a big fan of the stock. But the biggest reason is much more basic -- it's the company's business. Or, even more basic than that, it's Coke's namesake product.

The magic of Coke's core brand is its incredible endurance. Not only has the product not needed significant changes, its customers have actively resisted changes. Remember "New Coke"? Taste tests showed that people actually preferred the taste of the new formula, but nostalgia and the attachment to that original Coke formula elicited a huge backlash that forced the company to do a 180.

In other words, Coke is a product that gets sold over, and over, and over again, all over the world, with little need for changes or technological updates.

That means that unlike companies that sell TVs, computers, cell phones, video games, or a variety of other products, I can count on the fact that 10 years from now, Coke will still be satisfying customers all over the world with the same product. And, importantly, the price that those customers pay should roughly keep pace with inflation.

So naturally ...
I want to own more companies like Coca-Cola. That is, companies that have a product that customers will buy over and over again, without the need for significant retooling, and will do so without demanding a lower price.

Though the stock market isn't exactly awash in this type of company, there are certainly others out there that fit the mold. Here are a few of my favorites.

  1. Altria (NYSE: MO  ) and Philip Morris International (NYSE: PM  ) may leave a bad taste in some investors' mouths (no pun intended) since their business is slinging tobacco products. But as far as finding a business with a rock star of a product at its core, these two companies may out-Coke Coke. In the U.S. the Marlboro brand commands an amazing 42% of the cigarette market, and internationally it's been the top brand since 1972. Marlboro's 302 billion cigarettes sold internationally in 2009 beat the next three competitors combined.
  2. Diageo (NYSE: DEO  ) could likewise be categorized as "sin stock," but I'd prefer to categorize it as simply sinfully successful. Just as nothing needs to be done to keep the Coke product successful, Diageo doesn't need to do much to keep leading brands like Smirnoff, Johnnie Walker, Guinness, Captain Morgan, and Jose Cuervo -- to name a few -- trucking along. Motley Fool Income Investor advisor James Early recently made Diageo his pick for The Motley Fool's "11 O'Clock Stock" series, largely because of its amazing brand portfolio.
  3. Procter & Gamble (NYSE: PG  ) doesn't have a single product that provides the foundation of the company, but instead it has large portfolio of products. P&G does more tweaking to its products than Coke -- think about the changes to Gillette razors or innovations for Pampers diapers -- but brands like Tide, Vicks, Oral-B, Scope, Zest, and Old Spice don't need significant technological advancements to keep the dollars rolling in.

Do you have a favorite stock that fits the Coke model? Head down to the comments section and share it!

Fifty days, 50 stocks, plenty of ways to get Foolish. Don't miss out on the 11 O'Clock Stock!

Berkshire Hathaway and Coca-Cola are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Philip Morris International is a Motley Fool Global Gains recommendation. Diageo, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of and has written covered calls on Procter & Gamble. The Fool owns shares of Berkshire Hathaway and Coca-Cola. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, Coca-Cola, and Philip Morris International, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookies were harmed in the making of this article.


Read/Post Comments (26) | Recommend This Article (76)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2010, at 3:03 PM, lbcdpg wrote:

    UPS is a stock you can pretty much count on being around for the next 10 years. As more people buy products over the internet, somebody's gotta ship them to you, right? And as far as economic 'moats' go, this one is pretty large. Yeah, there's Fedex and the fading US Post Office, but neither of these will take out UPS. I don't see many start ups buying all the trucks/planes needed to start up an international shipping business. Also, last I checked UPS was paying a dividend north of 3%. I plan to let my kids decide when/if to ever sell this well-managed company, because I never will.

  • Report this Comment On August 02, 2010, at 4:38 PM, CPACAPitalist wrote:

    I get the feeling that you figured out the Kevin Bacon six degrees of seperation thing and then just wrote an article around that... but i'm glad you did because it was both hilarious and informative. Sin stocks are a great place to invest, I don't smoke or drink myself but I know i'm in the minority by far, and people will cut a lot before they nix smokes and booze.

  • Report this Comment On August 02, 2010, at 4:47 PM, cuculan wrote:

    The big M, McDonalds that is, measures up very well to Coke. Similar brand magnitude, similar profit margin, similar yield. However, the big M has one major advantage, it's share value has been continuously increasing for over 20 years (with some bumps along the way) Coke however has flatlined for the past 10 years. A considerable negative for investors hoping for capital appreciation.

  • Report this Comment On August 02, 2010, at 4:49 PM, JohnnyJay wrote:

    All the companies listed in this article are great. Another industry leader is UTILITIES. I just recently retired & rely on dividends as past of my income. I have many stocks in my portfolio, including some that were mentioned but none were utilities. They call these stocks the "widow & orphan" stocks. One that stands out for me is ConEdision of NY (ED). I have owned this stock for 24 years now & they have never failed to raise their dividend every year. Starting in 2011 I will stop reinvesting these dividends and take the cash. My investment of only $7500 in the early years back in 1985-86 built up the total shrs. over 900 today, valued @ $41,000+ with a nice cash div. exceeding $500/qtr. ED is part of NYC. They are tied together forever. As long as NYC is on the map so will ED. With a yield above 5% this is a company that MUST be listed as a lifetime hold.

  • Report this Comment On August 02, 2010, at 5:19 PM, 2beewise wrote:

    ".. I did meet Buffett once at a Berkshire Hathaway annual meeting, but I'm not sure that counts for much unless we're playing "Six Degrees of Kevin Bacon" (I met Buffett at the Berkshire annual meeting, Buffett made a cameo in All My Children with Susan Lucci, Lucci hosted an episode of Saturday Night Live and did a skit with Phil Hartman, Hartman was in Coneheads with Dan Aykroyd, Aykroyd was in Blues Brothers with John Belushi, and Belushi was in Animal House with Kevin Bacon. Bam!)."

    Wonderful! I love it!!!

  • Report this Comment On August 02, 2010, at 5:26 PM, TMFKopp wrote:

    @CPACAPitalist and 2beewise

    I can't say exactly where the inspiration to run Six Degrees came from, but I have to admit I was pretty happy about it. Who knew Buffett was a soap star???

    Matt

  • Report this Comment On August 02, 2010, at 6:16 PM, daniinLA wrote:

    About the New Coke vs. regular Coke -- In "Blink" by Malcolm Gladwell, the author does a great job of explaining that taste tests are basically bogus -- drinkers will prefer a sweeter beverage in a small sip (think "Pepsi Challange") than they would when consuming a full serving of the drink. Thus, Pepsi could win the challenge and people liked New Coke, but only if they're drinking only one sip. Thus the backlash against the sweeter beferage. OK, I know this is useless trivia, but I was completely fascinated by this insight into the New Coke fiasco.

  • Report this Comment On August 02, 2010, at 6:18 PM, daniinLA wrote:

    And yeah, I'm a big fan of the 7 degrees of Kevin game as well. Nice retro segue!

  • Report this Comment On August 02, 2010, at 6:40 PM, TMFKopp wrote:

    @cuculan

    I agree to a large extent on MCD (I own some myself). However, I'll note two things on the comparison:

    1) MCD's stock didn't reach the loony valuation heights that KO's did during the 2000 bubble. That has had a huge impact on the returns comparison.

    2) Past performance is no guarantee of future results -- just because MCD's stock outperformed KO's over the past decade doesn't mean that the same will hold for the coming decade (though, as noted above, I happen to think both stocks are pretty well positioned).

    Matt

  • Report this Comment On August 02, 2010, at 6:45 PM, TMFKopp wrote:

    @JohnnyJay

    I agree with you to a point on utilities -- the monopolistic positions in the markets they serve (and I'm talking regulated utilities here) give them a very safe future. However, the deal with the devil (umm, the government) to get that prime position also limits the upside of the ROE they can earn.

    Matt

  • Report this Comment On August 02, 2010, at 7:41 PM, scanlin wrote:

    I prefer covered slightly ITM covered calls on KO. You can get 25% annualized return with an Aug 55 right now (1.4 points ITM). No earnings risk.

    covered call screener: http://www.borntosell.com

  • Report this Comment On August 02, 2010, at 10:24 PM, 11787HOT wrote:

    Blah, Blah, Pepsi is doing better than Coke.I'm taking profits on ARNA,AEP,BIDU, BRK.B.

    WWE Has a big promotion going with 7up. WWE has great GDP, strond Dividend, cant go wrong. Check it out. I bought more.

  • Report this Comment On August 03, 2010, at 2:28 PM, hfsav001 wrote:

    The source of Six Degrees of Kevin Bacon:

    http://www.phillymag.com/home/display/Top_100_Philadelphia_M...

    Just in case you were wondering, fool.

  • Report this Comment On August 03, 2010, at 2:44 PM, GrumpyGopher wrote:

    I was going to add pipeline companies...just the toll roads for our energy needs.

  • Report this Comment On August 03, 2010, at 4:12 PM, DrRonPaul4Prez wrote:

    I love how high quality stocks can drop a few percentage points because of something as stupid as a quarterly report falling a tad bit short of analysts estimates. Tomorrow might be a good day to try to get into PG.

  • Report this Comment On August 03, 2010, at 10:45 PM, TMFKopp wrote:

    @GrumpyGopher

    "I was going to add pipeline companies...just the toll roads for our energy needs."

    Hmmm... yeah, in some ways I definitely agree. Definitely a moat for a lot of the pipeline companies. Just a bit more onerous / expensive to expand operations.

    Matt

  • Report this Comment On August 06, 2010, at 2:22 AM, Puckplayr4 wrote:

    I always find Matt's articles and I am always pleased. I've had a couple drinks with a lovely young lady, so bear with me...WWE, I agree, great stock, I hope it catches on with serious investors.

    About the Coke vs. McDonalds....interesting that McDonalds sells coke...not Pepsi.

    Also, and this is a bit of a tangent, but someone once told me that McDonalds isn't in the hamburger business, they are in the Real Estate business. They just happen to use their prime real estate to sell hamburgers. think about it...they have their restaurants in all the best spots. My point is that that there is another company following that model. Get the best locations and the sales will follow...and this company just started coughing up a Div...Starbucks. I don't own any, and it's had it's struggles, but seriously, its here to stay and you all know it...and that dividend had finally put it in my "Need to buy" category.

    About utilities...I like EDE and NGG the best. NGG has some international flavor which is nice.

    Great article, great comments. I need another drink!

  • Report this Comment On August 06, 2010, at 1:31 PM, bikingdoc wrote:

    Isn't anyone concerned about the possibility that Coke's core product may be vulnerable to all the concern about the obesity epidemic and Coke's fundamentally unhealthy and fattening product?

    There's a big push now in schools, workplaces,etc. for Americans to improve their health, lower weights, etc., by changing what we eat and drink. Top of the "avoid" list for healthy behavior is soda, with all the sugar and empty calories!

    Have to think this is at some point that these concerns and trends will impact Coke, Pepsi, etc. Ppwgtrenibc

  • Report this Comment On August 06, 2010, at 2:21 PM, ragedmaximus wrote:

    ha ha ha ha now that the market is going to tank.media is saying warren and his billionaire friends are going to cause the end to recovery because the philanthropists are give the money to charity instead of the govt in the form of taxes!! ha ha ha it's all the rich guys fault now ha haha

  • Report this Comment On August 06, 2010, at 2:21 PM, ragedmaximus wrote:

    ha

  • Report this Comment On August 06, 2010, at 2:21 PM, ragedmaximus wrote:

    ha

  • Report this Comment On August 06, 2010, at 2:21 PM, ragedmaximus wrote:

    cnbc ha

  • Report this Comment On August 06, 2010, at 2:22 PM, ragedmaximus wrote:

    ha

  • Report this Comment On August 06, 2010, at 2:44 PM, sean0sullivan wrote:

    Be honest now Matt -- we both know your pun on Altra and PM was intended. Take a bow and have smile.

  • Report this Comment On August 06, 2010, at 6:22 PM, mtracy9 wrote:

    "Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50 percent a year on $1 million. No, I know I could. I guarantee that." --Warren Buffett

    http://shouldersofgiantsinvestor.com/

  • Report this Comment On August 10, 2010, at 9:06 PM, tshk1221 wrote:

    Instead of PM, MO or PG with less than 10% Shil Cap Rate (True Yield) as of today, I would rather buy TRV, GCI, GS, NRG or TMK with Shil Cap Rate ranging from 19% for TMK to 29% for TRV as of today. GCI, if bought today, would have given us 26% initial cost efficiency and the amazing 26% annual compounding possibility if the management continues to generate the current levels of revenues and earnings.

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