Warren Buffett, often referred to as the "Oracle of Omaha," has a knack for backing companies that stand the test of time. Take American Express, for instance. His firm, Berkshire Hathaway, first invested $300 million in the company in August of 1991. Over the next four years, Buffett continued to purchase shares, raising the total investment to $1.3 billion by 1995. Today, the stake is worth more than $36.5 billion, paying a yearly dividend worth more than that initial investment 33 years ago.
The Coca-Cola Company (KO 0.18%) is another of Buffett's longtime bets and one of his best. In 1988, Berkshire invested $1 billion into Coke. Today his stake is worth $25.3 billion.
NYSE: KO
Key Data Points
Don't look for great deals; look for great companies
Many investors are obsessed with finding a great deal and making a trade at just the right time, but if Warren Buffett's example teaches us anything, it's that patience is key -- time in the market trumps timing the market. As Buffett himself put it, "When you find a truly wonderful business, stick with it. Patience pays."
What makes a business wonderful, in Buffett's opinion? While there are many factors to consider, one of the most critical components and a favorite of Buffett's is a "moat." As he puts it, "The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns. Therefore a formidable barrier... is essential for sustained success."
A formidable barrier, the moat, is a fundamental competitive advantage. For some, it is the ability to be the lowest-cost producer, while for others, it is a well-known and enduring brand.
Coke's brand is a formidable moat protecting its castle
Coke enjoys nearly unparalleled brand recognition. It is one of the oldest and most enduring brands in the U.S. It's so ingrained in American culture that in much of the South, "Coke" is used to refer to all soft drinks. 95% of Americans are "aware" of both Coke and its main soft drink competitor, Pepsi's namesake beverage but ask yourself how often you've heard a waiter say, "Is Pepsi OK?" This may seem trivial, but it's not. These cultural norms take generations to embed.
A more quantitative approach to measuring the strength of a brand is brand value, which is essentially the value a brand generates for a company. One way to evaluate it is to estimate the cost a competitor would incur creating and marketing a new brand of equal value -- a moat in dollar terms. Coke is the most valuable soft drink brand in the world, valued at $35 billion, up 4.6% from last year. Pepsi was worth only $20.2 billion.
It's important to note that Pepsi is spending enormously on advertising to shrink this gap. That $20.2 billion is up over 10% from the year before, more than double Coke's growth. Pepsi spent $5.7 billion in advertising last year compared to Coke's $5 billion.
Viewed from another angle, however, this is another feather in Coke's cap -- a testament to the brand's power. The company does not have to expend as many resources to stay top of mind for consumers. It happens organically.
Buffett still believes in Coke, so should you
Coke reported an 11% jump in organic sales for Q1 2024. That is an impressive uptick in a market that has many tightening their belts. Pepsi reported just 2.7% sales growth for the same period.
As Chairman and CEO James Quincey put it, the company is "delivering another quarter of volume, topline and earnings growth amid a dynamic backdrop" and is "primed for sustained success." Reflecting this optimism, the company raised its official guidance, expecting as much as 9% revenue growth for 2024, up from the 7% set out in the previous report.
Coke's stock has seen a slight bump after these numbers were released, but it is still relatively well-priced at the moment. The company's price-to-earnings (P/E) ratio of 25.4 is significantly less than the industry average of 57.1 and less than PepsiCo's of 27.
Now, to be sure, Coke is not a high-growth stock. Don't expect a return that compares to what a tech stock can bring you. This is a long-term buy-and-hold: a blue-chip stock with a healthy dividend that is likely to deliver consistent, if modest, returns year in and year out. But if you want to invest like Warren Buffett, that is just fine.
As Buffett puts it in his latest annual report, "Could I create a better worldwide business than [Coke]? As Bertie [Buffett's sister] will tell you: 'No way.'" That's why the Oracle of Omaha hasn't sold one of his 400 million shares for over a decade. Given his company will rake in $776 million in dividends from Coke this year alone, why would he?
