Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has owned shares of Coca-Cola (KO 1.34%) since 1988. That decision to buy and hold the beverage giant's stock long-term has really paid off. Shares have risen over 3,500% since Buffett's initial purchase. That has increased the value of Berkshire's position to over $28 billion, making Coca-Cola the fourth-largest holding in its investment portfolio, at 9.1%.
The global beverage company continues to grow value for long-term investors. Its nearly 3%-yielding dividend, which it has increased for 63 consecutive years, is a big part of its value proposition. This consistent dividend growth provides investors with a reliable income stream -- Buffett's company collects over $800 million in dividends each year -- alongside its rising stock price. Coca-Cola is in a strong position to continue growing shareholder value, evidenced by its solid third-quarter results despite a myriad of headwinds.
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A solid quarter despite the challenges
Coca-Cola's net revenues grew 5% in the third quarter to $12.5 billion and were up 6% on an organic basis after adjusting for the impact of asset sales and acquisitions. Meanwhile, its comparable earnings increased 6% to $0.82 per share, which includes the negative impacts from foreign exchange headwinds. Both metrics exceeded analysts' expectations ($12.4 billion in revenue and $0.78 per share in earnings).
Those strong results came amid continued challenges in the market environment. Volume growth in Latin America and North America was flat, due in part to the impact inflation and slowing economic growth are having on lower-income customers. The company has worked to offset those headwinds by offering those customers more affordable options, such as mini cans. It has also benefited from its strategy to provide more options to higher-income customers, who continue to buy premium brands like Fairlife and Smartwater. Additionally, the company is benefiting from its broader beverage portfolio as sales of water, sports drinks, coffee, and teas were up, helping offset flat soft drink sales and lower sales of juices, value-added dairy products, and plant-based beverages.
NYSE: KO
Key Data Points
Coca-Cola has produced solid cash flows this year despite its headwinds. It has generated $8.5 billion in free cash flow year-to-date and $2.4 billion after accounting for the $6.1 billion contingent consideration payment it made related to its 2020 acquisition of the remaining stake in Fairlife from its joint venture partner. The company has ample financial capacity to fund that payment while continuing to pay its dividend (which costs about $8.5 billion annually). Even with that Fairlife payment, Coca-Cola's net leverage ratio is toward the low end of its 2.0-2.5 times target range.
Trading bottles for more beverages
Coca-Cola continues to position its business to grow shareholder value. One way it's doing that is by continuing to sell off its bottling operations. The company and its joint venture partner recently agreed to sell a 75% stake in Coca-Cola Beverages Africa, the largest bottler on that continent. The deal valued the bottling business at $3.4 billion. The buyer has the option to acquire Coca-Cola's remaining 25% stake in the next five years.
With this sale, Coca-Cola will have refranchised most of its company-owned or controlled bottling operations. As a result, only 5% of its revenue will come from bottling after the sale closes next year, down from 52% in 2015.
The company has been using the proceeds from its bottling operation sales to strengthen its balance sheet and make value-enhancing acquisitions, such as Fairlife. Since 2016, acquisitions have contributed a quarter of the company's earnings growth.
Coca-Cola has also been investing heavily in organic growth initiatives. Those investments are paying off. Fuze Tea, for instance, is growing five times faster than the industry average. Meanwhile, its two sports brands, Powerade and Bodyarmor, are delivering above-average growth. That's all part of the company's long-term strategy of delivering 4% to 6% annual organic revenue growth and high single-digit earnings-per-share growth. That earnings growth should enable Coca-Cola to continue increasing its dividend.
A successful formula
Coca-Cola's high-quality beverage portfolio generates reliable and increasing cash flows, enabling the company to pay an attractive and steadily rising dividend. This consistent dividend growth has helped the company grow value for long-term shareholders, such as Buffett's Berkshire Hathaway. As Coca-Cola's third-quarter results show, it's in a strong position to continue increasing its dividend. That makes the company an attractive long-term investment.
