Warren Buffett took the helm of Berkshire Hathaway in 1965. Since then, the company has increased 43,000 times in value under his leadership, compounding twice as fast as the S&P 500. Today, Berkshire has a market capitalization of $800 billion, and its $360 billion stock portfolio factors heavily into that valuation.
Buffett reportedly manages about 90% of that portfolio, and the biggest positions are generally under his control. That includes Cola-Cola (KO), a stock he started buying in 1988 at a split-adjusted price of $0.69 per share. Berkshire now has a $24 billion stake in the beverage company, meaning it accounts for 6.6% of its entire portfolio.
To add context, Berkshire only has three bigger positions: Apple at 47.1%, Bank of America at 9.5%, and American Express at 7.8%. Given that asset allocation, it's fair to assume Buffett has a great deal of conviction in Coca-Cola, so investors (especially income investors) would be wise to consider the stock.
One of the safest dividend stocks on the planet
Coca-Cola is part of an elite group of stocks known as Dividend Kings. These are companies that have increased their dividends annually for at least 50 consecutive years. Coca-Cola more than meets those criteria. Its payout has increased for 61 consecutive years, making it one of the safest dividend stocks on the planet.
In 2023, the company paid a dividend of $0.46 per share quarterly, or $1.84 per share for the year. History says the payout will increase in 2024, but the extent of that increase is impossible to guess. So I'll assume $1.84 per share to keep things simple. At that level, $10,000 invested in Coca-Cola (about 167 shares) would generate $307.28 in annual dividend income.
The stock has a dividend yield of 3.08%, more than double the S&P 500's dividend yield of 1.47%. Of course, an above-average yield means nothing if the stock declines substantially. But Coca-Cola is on solid financial footing, and it has reasonable growth prospects for a century-old company.
Coca-Cola has a durable competitive advantage
Buffett believes Coca-Cola benefits from a durable economic moat built on brand authority and pricing power, qualities he sees as essential to long-term capital appreciation. He once highlighted the resilience of that moat by saying, "If you gave me $100 billion and said take away the soft-drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done."
Effective marketing and a broad network of bottling and distribution partners -- Coca-Cola has assembled the largest beverage distribution system in the world -- have positioned the company as the leader in carbonated soft drinks (CSDs) across most geographies. For instance, in the United States, Coca-Cola accounts for about 46% of CSD sales by volume, giving the company nearly twice as much market share as PepsiCo.
The upshot is that Coca-Cola has an iconic brand, unparalleled distribution capabilities, and a leadership position in the market. Those qualities create pricing power and cost advantages that allow the company to consistently earn a higher profit margin than its peers, as shown in the chart below.
KO Profit Margin data by YCharts
Greater profitability allows Coca-Cola to reinvest more heavily in strategic growth areas. For instance, management sees considerable growth opportunities with its core carbonated beverage portfolio in emerging markets across Latin America and the Asia-Pacific region.
The company is also pursuing opportunities in non-carbonated beverage categories like coffee (Costa) and sports drinks (Powerade, BodyArmor). Additionally, Coca-Cola recently started experimenting with alcoholic beverages.
Why income investors should consider Coca-Cola
Coca-Cola reported reasonably good financial results in the September quarter. Revenue increased 8% to $12 billion, driven by modest growth in unit case volume and more substantial price increases, and GAAP net income climbed 9% to $0.71 per share. During the quarter, Coca-Cola reinforced its leadership position in non-alcoholic ready-to-drink beverages by gaining market share in EMEA (Europe, Middle East, and Africa), North America, and the Asia-Pacific region.
Going forward, Wall Street expects Coca-Cola to increase earnings per share at 6% annually over the long term. That forecast makes its valuation of 24.1 times earnings look a bit expensive. From that price, Coca-Cola may not beat the market over the next five years -- indeed, it underperformed the S&P 500 last year -- but the stock still looks attractive for income investors.
Coca-Cola is a highly profitable company with a durable moat and reasonable growth prospects. Those qualities should support annual dividend increases for the foreseeable future. Investors willing to exchange some price appreciation for a safe, above-average dividend check should buy a position in Coca-Cola stock today. As mentioned earlier, every 167 shares (currently about $10,000) will generate about $307 in annual dividend income.
