With over three dozen stocks in Berkshire Hathaway's (BRK.A +1.02%)(NYSE: BRK.B) portfolio, there's one company that Warren Buffett clearly has an ongoing love affair with because he's owned it for over 30 years and says he will never sell it: Coca-Cola (KO +1.15%).
Buffett certainly knows a thing or two about making himself and his investors rich. Since 1965, Berkshire Hathaway has generated average annual returns of 20%, or almost double what the S&P 500 has achieved in the same time. The key to his success has been his ability to identify a business' key competitive advantages that can be replicated for years to come, buy the stock, and then hold on to it for years. One of the Oracle's most famous quotes is, "The best time to buy is whenever you have money; and the best time to sell is never."
Although not even Buffett strictly follows that advice, his purchase of Coca-Cola stock highlights the idea and underscores why the soft drink maker comprises almost 8% of his holdings. It's well known that Cherry Coke is the billionaire investor's drink of choice, but here are a few of the reasons he loves the company.
Image source: The Motley Fool.
1. Good company at a reasonable price
There are 400 million shares of the beverage giant's stock in Berkshire that are currently valued at $22.7 billion, but Buffett first began purchasing them after the 1987 stock market crash at a split-adjusted price of $2.73 a share. While the stock wasn't a deep discount stock at the time, trading at around 15 times earnings and four times its book value, its track record of consistent earnings growth over the years indicated Coca-Cola would be worth a lot more in the years to come.
Since Buffett first bought 23 million shares in 1988 and 1989, Coke has split its stock four more times, each at a 2-to-1 ratio, and its stock currently goes for more than $56 a share with a price to earnings ratio of 25 and a price-to-book mark of over 10.
2. Recognizable global brand
While Buffett probably doesn't buy a stock simply because of its branding, the intrinsic value it offers to a business can often do the heavy lifting of consumer acceptance. Because name brands invoke a level of quality and consistency, consumers tend to repeatedly return to them. That drives sales, which in turn drives profits.
According to Brand Finance, Coca-Cola has the strongest brand in the Americas with a AAA+ rating and second only to China's WeChat globally. It's also the most valuable soft drink brand in the world, with a value pegged at $35.4 billion. With a market valuation of over $247 billion, Coca-Cola ranks as one of the premier consumer staple stocks.
NYSE: KO
Key Data Points
3. Dependable dividend payer
Coca-Cola has paid a dividend every quarter since 1920 and has raised the payout every year since 1963. That 59-year history of dividend increases puts the beverage company into an elite group of stocks known as Dividend Kings, or companies that have hiked their payout annually for 50 years or more. There are actually few companies with as long of a track record as Coca-Cola.
With 400 million shares of Coke stock, the quarterly dividend payment of $0.44 per share means Buffett is making $176 million every three months, or almost three-quarters of a billion dollars every year. That's just on dividends alone and not including any capital appreciation.
Is Coca-Cola a stock for you?
Coca-Cola's business throws off significant amounts of free cash flow, or the amount of money left over after it pays its bills, and Coke is estimating it will produce as much as $10.5 billion this year, or 20% more than last year.
It's also noteworthy that over the past year while the S&P 500 has fallen nearly 13%, Coke's stock is up almost 7%. That sort of strength amid adversity can help sustain investors. Although Coca-Cola isn't a bargain today, just like it wasn't necessarily one when Buffett first bought it, in difficult times like these an investor might just want to have it in their portfolio, too, for a level of safety and comfort that might not be available with any other stock.
