Like bargains? Most people do. Whether you're talking about groceries, airplane tickets, or automobiles, the lower the price, the better the buy.
Bargain prices aren't limited to physical goods though. Stocks can be bargains as well. Billionaire investor Warren Buffett largely became a billionaire, in fact, by buying value stocks as a means of maximizing the long-term bang he gets for his investment buck. That's why -- given enough time -- his Berkshire Hathaway fund outperforms the S&P 500. That's also why you would be wise to borrow a pick or two from Berkshire's portfolio when the need arises.
To this end, there's one particular Warren Buffett stock most investors might want to think about stepping into right now while it's still ridiculously cheap: The Coca-Cola Company (KO 1.55%).
The Coca-Cola Company isn't quite the company you think it is
You know the company. Coca-Cola is of course the world's biggest beverage outfit, just as its namesake cola is the world's most popular carbonated drink. You also probably know this is the company that owns Sprite, Barq's root beer, and all the variations of these fizzy beverages.
What you may not know is that The Coca-Cola Company is also the name behind a wide range of non-carbonated beverages including Minute Maid juice, Gold Peak tea, and Dasani water, just to name a few. This diverse product portfolio means it's got something that meets every consumers' taste at any given time.
It's not just this array of products that makes Coca-Cola stock a longtime Buffett favorite (although it certainly doesn't hurt the bullish argument). There's also the company's sheer size, and its subsequent reach. With greater scale the company can afford to advertise more aggressively as well as exercise leverage with its distributors and retail partners.
Perhaps the most compelling reason anyone would want to invest in Coca-Cola stock, however, is also the one that's least obvious. That's its business model.
The Coca-Cola Company doesn't actually do much bottling these days. It primarily sells flavored concentrates to localized, separately owned bottlers so it can focus on what it does best, marketing. This model offloads a great deal of the beverage business's operational risks such as soaring production costs or distribution hassles... a detail that has proven particularly beneficial to Coca-Cola of late in the shadow of soaring inflation. The company collects its regular royalties regardless of what it costs bottlers to manufacture the final product.
For Buffett though, Coke's brilliant business model is just a means to a bigger end. His ultimate goal is something else much more specific.
In good times and bad, Coca-Cola performs
It (almost) goes without saying that the point of any investment in any stock is achieving a return on the capital you're putting at risk. Berkshire's $25 billion stake in The Coca-Cola Company is no exception to this norm.
Buffett's interest in this particular stock, however, is mostly rooted in how consistently the company's able to turn ever-growing revenue into ever-growing profits, much of which are immediately passed along to shareholders in the form of dividends.
While beverages aren't a high-growth business, they're a business that will never become obsolete. People will always get thirsty; they'll usually purchase the same beverage brands they've been buying for years. Coca-Cola's consistently delivered marketing messages ensure it.
End result? The Coca-Cola Company is a cash cow -- a slang term for companies that may not necessarily experience a great deal of annual growth, but are capable of generating cash flow in good times as well as bad. In this vein, Coca-Cola earned nearly $7.8 billion worth of net income in pandemic-crimped 2020, down a modest 14% from 2019's bottom line. Operating cash flow of more than $9.8 billion was within sight of 2019's $10.5 billion that year as well despite the headwind. And, both figures were far bigger last year, underscoring the company's resiliency along with its slow-but-steady growth cadence.
KO Net Income (TTM) data by YCharts. The lulls in net income and cash flow between 2013 and 2018 reflect restructuring costs related to the sale of The Coca-Cola Company's bottling operations back to localized bottlers. They are not a reflection of the company's operational health at that time.
Shareholders continue to directly benefit from this bottom-line growth, too. As has been the case for years now, Coke's investors are still receiving on the order of three-fourths of the company's profits in the form of dividends. Last year alone Berkshire's 400 million-share position in The Coca-Cola Company would have produced $736 million worth of dividend income.
Those are dividends that have now been raised for 62 consecutive years.
But is Coca-Cola stock actually cheap?
The company's backstory and pedigree are certainly compelling, while the stock's trailing dividend yield of 3.1% is above average. But some investors might balk at this stock's valuation. Coca-Cola shares are currently priced at 25 times their trailing earnings, and more than 22 times their projected per-share profits. That's not cheap by most peoples' basic standards when evaluating a potential holding.
This is one of those cases where you can expect to pay a premium for quality, however.
See, "cheap" is a relative idea; cheaper than what? Factors that can force an investor to further redefine what qualifies as "cheap" are the length of time a particular company is apt to maintain its current level of risk, or results, or growth. At the same time, how certain are the answers to any of those questions? Additional uncertainty can also inform how much a price premium a stock deserves.
From this perspective, Coca-Cola is cheap not because it sports a low price-to-earnings ratio (because it doesn't), but because it's almost certain to continue cranking out steady earnings growth that will in turn drive steady dividend growth.
KO Dividend data by YCharts
From this risk-minded cash-in-hand-right-now perspective, Coke stock is cheap.
Or if that doesn't convince you, this might. When Berkshire Hathaway first began acquiring shares of The Coca-Cola Company following the market crash of 1988 it only paid on the order of 17 times the stock's trailing earnings. The shares of the company Berkshire subsequently purchased after initially stepping into Coca-Cola, however, were bought at a price/earnings ratio as high as the low-20s. And the stock's valuation has lingered near that number ever since. Yet, the price of Coke stock has outright soared since Buffett stopped buying it back in the mid-90s. Clearly this low-risk stock's above-average valuation isn't holding its performance back.
Or, maybe Buffett just understands there's more to the matter than an arbitrary number based on past or projected earnings. In his own words, "price is what you pay, value is what you get."
That point applies perfectly to Coca-Cola shares right now. While the stock's sporting an above-average price-to-earnings ratio, the value you get for its price is actually a bargain. Don't overthink this one.
