There is something to be said about the old adage, "less is more." As investors, oftentimes, it can be tempting to take out your figurative magnifying glass and look for the next needle in a haystack. While financial analysis can be entertaining, albeit arduous, this approach can be precarious. It's easy to convince yourself that you've found an undervalued gem that is going to generate market-beating returns.
A lot of times, the obvious answer is staring you right in the face. Typically, blue chip stocks are safe, reliable investments. This hypothesis is what has separated Berkshire Hathaway founder Warren Buffett for decades. Buffett is a longtime advocate of companies that generate steady cash flows and pay dividends.
One of his most successful investments is the Coca-Cola Company (KO 0.14%), of which he owns nearly 9% and is the company's largest shareholder.
While a beverage company may not have the allure of next-generation software, it is precisely the type of company that Buffett loves. Let's dig into why.
Isn't it just soda?
People don't realize that many of the brands that are stocked on shelves are owned by a small cohort of companies. While Coca-Cola is perhaps best known for its distinctive, Christmas-red bottles and cans of soda, the company is the parent to other beverage types, including water, coffee, and even alcohol.
Unlike technology companies, food and beverage corporations may not gear their expenses toward innovative new products. Rather, these companies often acquire brands and build a portfolio to diversify their product suites.
This approach makes sense because all of these different beverage types allow Coca-Cola to enter different end markets. As a parallel, think about fashion. Some fashion brands sell high-end luxury clothes or accessories that are targeted toward a specific demographic. On the other hand, some fashion brands create more general, affordable items in an effort to capture a larger base.
For Coca-Cola, the acquisition of water, energy, and coffee drinks, as well as sparkling soft beverages, means the company is able to expand its reach. According to its investor presentation, Coca-Cola's total addressable market is approximately $1.3 trillion, nearly double what it was in 2017.
Furthermore, a new category that Coca-Cola specifically cites in its presentation called "emerging" includes alcoholic beverages that are typically in cans. This is a new trend in the alcohol sector called "ready-to-drink" (RTD).
The RTD market is in its early stages, and estimates of its size vary significantly. Keep in mind RTD is not just for cocktails. Rather, RTD beverages include hard versions of seltzer, tea, and even kombucha.
The overarching theme here is that as Coca-Cola acquires more brands across a variety of beverage types, its products are inherently sold in more kinds of retail outlets. Subsequently, Coca-Cola creates a network effect as its brands become more fixed parts of society and touch people across an increasing number of demographic segments. Per the investor presentation, Coca-Cola currently has its products in roughly 30 million outlets across the globe.
Image source: Getty Images.
Rewarding investors in times of uncertainty
NYSE: KO
Key Data Points
It's no secret that the stock market has cooled from the euphoric days of meme investing. 2023 has gotten off to a brutal start, as big tech companies seemed to emulate some sort of domino effect, following one after the other in employee layoffs.
Due to fears of a potential recession, coupled with a lingering inflationary environment, companies across just about every industry are looking to tighten budgets. Generally speaking, so-called recession-proof stocks are those that are not as exposed to cyclical macroeconomic factors. A great example of this is consumer staples.
While Coca-Cola soda may not be a necessity (or staple), other beverages, such as water and sports drinks, are about as close as the company can get. People need to consume water in order to stay healthy, and athletes and fitness enthusiasts often choose sports hydration drinks like Body Armor and Vitaminwater, both of which are owned by Coca-Cola.
Given its relative immunity to an inflationary environment, Coca-Cola was able to do something that most companies in this volatile market cannot -- namely, the company is rewarding shareholders in the form of an increased dividend. Per the press statement:
The Board of Directors also approved raising the quarterly dividend approximately 4.6 percent from 44 cents to 46 cents per common share.
The quarterly dividend is equivalent to an annual dividend of $1.84 per share, up from $1.76 per share in 2022. The first quarter dividend is payable April 3 to shareowners of record as of March 17.
The company returned $7.6 billion in dividends to shareowners in 2022, bringing the total amount of dividends paid to shareowners since Jan. 1, 2010, to $76.8 billion.
Say what you will about the mundane business that is soda and other beverage types. Coca-Cola has the proven financial flexibility to inspire its investor base. To put the concept of dividends into perspective, think about Buffett's holdings alone. Over his lifetime ownership of the stock, he has accumulated more than $10 billion of income just from dividends. That's billions of dollars handed to him simply for buying and holding the stock.
Is the stock a buy?
Here's the thing -- Coca-Cola is not the type of stock that will double overnight. It is not high-tech, nor is it an overly innovative company.
While Coca-Cola may not be as lucrative of an investment as a high-flying software company, it's more likely that it will be around in the long term. Investors see companies in many different industries, but particularly tech, rein in expenses as cash runway and liquidity are concerns. By contrast, Coca-Cola has been around for over 130 years. That's because it's a big brand that people recognize across the world, it appeals to many different kinds of people, and it has done a generous job of rewarding its investor base.
There is a reason why Buffett has owned the stock for decades. Simply put: It's safe. I cannot stress enough that the most prudent approach to investing is to have a long-term horizon. If you are looking to diversify or find some investments that may be less sensitive to an otherwise acute market, Coca-Cola may be worth putting on your radar.
