They don't call him "the Oracle of Omaha" for nothing. Thanks to a phenomenal track record running Berkshire Hathaway, Warren Buffett is an investing legend. This makes him one of the most widely followed experts for everyday investors.
Berkshire has compounded capital partly due to its massive public equities portfolio, which owns dozens of different companies. Apple has received a lot of attention in recent years.
However, there's one Warren Buffett stock that was able to turn a $1,000 initial cash outlay 50 years ago into $225,000 (as of April 23). Here's what investors need to know.
Quenching Buffett's thirst
Apple has the spotlight because it has been Berkshire's largest holding for some time. The conglomerate has a nearly 22% stake in American Express as well. Those two industry-leading companies sit at the top of Berkshire's portfolio.
But investors can't ignore Coca-Cola (KO 0.01%). It's the third biggest holding, currently valued at $29 billion. Since April 1975, the beverage giant has generated a total return of 22,400%. That type of gain is spectacular.
It's not hard to figure out why Buffett appreciates this company. Coca-Cola possesses a wide economic moat, supported by its strong brand. With a presence in 200 countries and more than 200 different products, the business caters to customers all around the globe who might have varying tastes and preferences. The fact that Coca-Cola has been around for more than a century also adds to the brand's legacy.
The company's marketing strategy aims to maintain broad visibility. For example, Coca-Cola has been a longtime sponsor at the Olympics, putting it in front of billions of eyeballs.
Customers are loyal to the Coca-Cola brand. This introduces what is perhaps Buffett's favorite business characteristic: Pricing power. Coca-Cola has the rare ability to consistently ask people to pay higher prices over time. That's only possible when customers truly love what you sell.
Profitability is another obvious reason why Warren Buffett likes Coca-Cola. It's worth mentioning that the company primarily sells concentrate, which is then bottled by partners. The result is a fat bottom line. In the past decade, Coca-Cola's operating margin has averaged a superb 27%.
Historically, Coca-Cola has continued to quench the thirst of not only Berkshire's portfolio, but of people all over the world. By constantly trying to expand the product portfolio, the business makes sure that it's always ahead of the curve when it comes to new beverage categories.
NYSE: KO
Key Data Points
Do you like dividends?
Berkshire currently owns 400 million shares of Coca-Cola. Based on the company's $0.51 quarterly dividend, this equates to $816 million in annual income for the conglomerate. That's impressive.
This points to what I believe is the only reason investors will want to buy and hold the stock -- its dividend. In February, Coca-Cola announced that it had increased the quarterly payout for the 63rd straight year. Income investors can't argue with that unbelievable track record. Thanks to the company's huge profits, there is minimal risk of this going away.
On the other hand, there are investors out there who want to own stocks that they believe can outperform the broader market over time. I don't believe Coca-Cola is the right fit if this sounds like you. It has underperformed in the trailing five- and 10-year periods. And given the extremely mature nature of the company and industry, with muted growth prospects, it's hard to believe that huge returns are on the horizon.
The stock has generated significant wealth over the past five decades. But investors who want to beat the market should probably avoid Coca-Cola. Only those who want income might be compelled to buy.
