One of Warren Buffett's all-time great investments is Coca-Cola (NYSE:KO), and it just happens to be the stock Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has held the longest. There is no other holding that better exemplifies the Oracle of Omaha's investing skill, patience, and temperament than this one.

Buffett first started buying shares of Coca-Cola in 1988, not long after the famous Black Monday stock market crash in 1987. By the end of 1989, he had purchased 23.35 million shares worth $1.8 billion. 

Berkshire Hathaway's book value in 1989 was $4.9 billion, which means Coke stock comprised more than 20% of Berkshire's net assets. It was a bold investment decision, and it was made in the aftermath of one of the most severe market crashes in history.

But it's the willingness to step up to the plate and swing big at fat pitches during uncertain times that has made Warren Buffett a legend. Since the end of 1988, Coke stock has climbed 1,750%. We'll look at Buffett's history buying Coke, how much profit the stock has made for Berkshire Hathaway, and his current views on the beverage giant. 

Warren Buffett

Image source: The Motley Fool.

Long-term investing at its finest

Buffett has rarely transacted in Coke stock since 1989. He added to Berkshire's holdings in Coca-Cola in 1994, bringing its ownership to 100 million shares at the time, but Buffett has never sold a single share. 

The stock has split two times since 1994, bringing Berkshire's ownership to 400 million shares. The cost basis on those shares is $1.299 billion. At the current stock price of $51.71 per share, Berkshire's investment in Coke is worth $20.7 billion. That leaves an unrealized gain of $19.4 billion on the investment.

The gains are even larger when factoring in dividends. At Coke's current quarterly payout of $0.40 per share, Berkshire's 400 million shares will bring in $640 million over the next year in dividend income. Since 1995, it has earned about $7 billion in dividends from the Coke investment. 

What factored into Buffett's decision to buy Coke stock

Buffett used to be a PepsiCo guy, so the decision to suddenly switch to drinking Cherry Coke and then drop $1 billion on the stock in 1988 and 1989 probably shocked his family and friends.

It certainly shocked those on Wall Street and other outsiders who were used to seeing Buffett buy cheap media and industrial stocks in the 1970s. He gained his knack for finding bargain stocks from Benjamin Graham, considered the pioneer of value investing

In Buffett's 1988 letter to shareholders, he addressed his investment in Coke for the first time, and in doing so, expressed his fundamental approach of buying great companies and holding for the long haul that has inspired many to follow in his footsteps: "We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

In the 1989 letter, Buffett elaborated on his decision to invest such a high percentage of shareholders' capital in Coca-Cola. He complimented the job Coke's CEO at the time, Roberto Goizueta, was doing in using great marketing and financial skills to return the company to growth after a stagnant period in the 1970s. 

One of the reasons Buffett decided to buy Coke in 1988 was that the brand had a lot of potential to grow overseas, and it was trading at a modest valuation, with a price-to-earnings ratio of about 15 times earnings in 1988. From 1989 through 1999, its earnings per share grew at a compound rate of 12% per year. 

Buffett's investment in Coca-Cola shows that you don't have to be a math whiz or have a high IQ to build wealth with stocks. In a way, his investment in Coke was classic Peter Lynch, the famed mutual fund manager who advocated "invest in what you know." 

Buffett had spent decades observing Coke and what made it such a great business. As he describes in the 1989 shareholder letter, the brand first made an impression on him in 1936 when he bought Cokes at the rate of six for 25 cents in order to sell for a small profit. "In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product," Buffett wrote.

Coke is still good, but not great

While Buffett still characterizes Coca-Cola as a "very good business," he admits that the consumer backlash against sugary sodas has put a ding in its armor. During an interview on CNBC in 2018, Buffett said of Coca-Cola, "It doesn't look as good as it did five or 10 years ago."

Coke has expanded into non-soda products, such as coffee and tea, to keep growing, but they don't generate the high margins like making the concentrate for soda does. Still, Buffett commends CEO James Quincey for finding ways for the company to keep selling more liquid ounces to consumers every year. 

The company may not have the growth prospects it once did, but Buffett says it has the best distribution system in the world, which should serve the company well as it expands into energy drinks and comes up with new products like Coca-Cola Plus Coffee to win a new generation of consumers.