It's no secret that billionaire investor Warren Buffett is a huge fan of Coca-Cola (KO), both the business and the beverage. The stock is one of Berkshire Hathaway's (BRK.A -0.76%) biggest holdings today, in fact, thanks to some impressive capital gains over the past 30 years.
But Buffett is even happier about the dividend payments that Coke sends out with predictable frequency. In 2022, annual income from this one Berkshire holding crossed $700 million and was a large part of what Buffett called the "secret sauce" that's responsible for the company's market-thumping portfolio returns.
The good news is investors can sprinkle a bit of that secret sauce into their own portfolios right now. And, thanks to Wall Street pessimism about Coke's short-term growth opportunities, they don't have to pay a huge premium for this dividend stock.
Winning market share
The biggest knock against Coke's business today is that the company's sales volumes are sluggish. Volume was flat in the most recent quarter as consumers scaled back on their on-the-go beverage purchases following big gains in 2022.
Look closer, though, and you'll see plenty of signs of the strength that has kept Coke on top of the beverage industry for decades. Prices were up 10% last quarter, helping overall organic sales rise a blistering 11%. Coke gained market share across the portfolio and found success both in core franchises like Coke and Sprite, and in relatively newer brands such as Smartwater and Topo Chico. "We are executing efficiently and effectively," CEO James Quincey told investors in late July.
Cash and profits
Coke's finances are sparkling, too. Gross profit margin is rising in 2023, and operating profit margin is holding above 20% of sales, even as the company spends more on advertising. Earnings last quarter were up 34% to $0.44 per share.
KO Free Cash Flow data by YCharts
The company's free cash flow is just as impressive, landing at $4 billion over the first half of 2023. These resources give Coca-Cola plenty of flexibility to be aggressive in areas such as marketing and innovation around new product releases. They also support the company's growing dividend, which today yields above 3%. PepsiCo (PEP -0.62%) stock, for context, is yielding 2.7% right now.
Price and value
Coke's stock has not been a winner so far in 2023. Shares are down 8%, in fact, making it one of the worst performers on the Dow Jones Industrial Average to date.
Yet that slump could be setting investors up for some solid returns over the long term as it pushes Coke's valuation down relative to its peers. Coke isn't struggling to find growth avenues, after all. And by passing along higher costs to consumers over the past few quarters, it is now in a great position to protect or even expand profit margins as inflation settles back down.
In the meantime, income investors can sit back and collect Coke's dividend payment, which has increased in each of the past 60 years. Those steady annual hikes helped Berkshire Hathaway's yearly income from the investment jump from $75 million in 1994 to over $700 million today. Future boosts to the dividend should help amplify investors' returns over the next few decades, even through weak stock return periods like the one that shareholders are seeing so far in 2023.
