According to billionaire investor Warren Buffett, achieving excellent returns as an investor is mainly about buying wonderful businesses and holding them for many, many years. The CEO of Berkshire Hathaway has trounced the S&P 500 over decades using that approach, creating many millionaire shareholders in the process.
One of Buffett's favorite stocks is a consumer staples company that already enjoyed a dominant market position when he bought shares in the early 1990s. By 1994, Berkshire had accumulated 400 million shares of the company for a total outlay of $1.3 billion. That investment has grown into one of Buffett's biggest portfolio holdings and now returns over $700 million in annual dividend income alone.
The stock in question is Coca-Cola (KO -1.39%). Although the soda giant's growth prospects aren't as strong today as they were 30 years ago, it's still an attractive buy for investors. Let's look at some reasons why you might want to follow Buffett into this holding.
Sparkling growth
Few consumer staples giants are expanding sales at a double-digit clip today, but Coke is one of the rare exceptions. The chain reported an 11% organic sales spike in late April, keeping growth about steady with the previous quarter. For context, PepsiCo announced just a 3% uptick.
Coke is faring better than its rivals, mainly thanks to competitive advantages like its massive scale, marketing prowess, and exposure to a wide variety of growth niches including energy drinks, teas, and waters. These factors have helped keep Coke on top of its industry, even while consumers have become more cautious in their spending habits.
"We believe our global system is primed for sustained success," CEO James Quincey said in a late-April press release.
Cash returns
In a recent letter to shareholders, Buffett said dividend income is the "secret sauce" that has helped power his market-thumping returns over the years. His Coke holdings delivered $75 million in annual income in 1994 when Berkshire completed its purchases of the stock. And now, that income has grown to over $700 million a year, simply through the beverage giant's steady annual raises. "We expect those checks are highly likely to grow," Buffett said.
KO Cash from Operations (TTM) data by YCharts.
Coke's most recent 5.4% dividend hike pushed the quarterly payout to $0.49 per share from $0.46 per share. That mid-February increase was the company's 62nd consecutive annual boost. Strong cash flow and rising earnings mean there's plenty of room for the company to keep increasing its dividend in 2025 and beyond.
The price is right
Even the best business won't make a great investment if the stock price is too high when you purchase it. The good news is that investors don't face much risk here. Coke's shares have underperformed the market in the past year, falling 3%, while the S&P 500 has gained 25%. You can own Coke for a relative steal of 6x sales, down from a valuation of over 7x sales through most of 2022.
It's true that you can find faster sales growth outside of Coca-Cola's consumer staples industry. But the stock delivers a balance between growth, cash returns, and profitability that's hard to find on the market. Toss in the fact that the beverage specialist is trading at an attractive price and delivering an instant 3% dividend yield, and this stock seems like an obvious candidate to have near the top of your investing watchlist.
