As most investors know, Greg Abel took the reins at Berkshire Hathaway from Warren Buffett at the end of last year. Although Buffett had long allowed his lieutenants to make some investment decisions, he had a hand in most of Berkshire's stock choices. That leaves investors wondering how Abel will invest differently from Buffett.
Indeed, Abel sold some of Berkshire's consumer stocks, such as Amazon and Domino's Pizza. Nonetheless, one has to expect Abel is also going to keep some of the company's longtime holdings. Despite some challenges, one of those keepers will almost certainly be Coca-Cola (KO +0.27%). Here's why.
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The value of Coca-Cola to Berkshire
Abel's decision to continue holding Coca-Cola will likely hinge on one factor -- its dividend.
Coca-Cola shareholders will earn $2.12 per share in annual dividends this year. More importantly, Coca-Cola is a Dividend King by virtue of hiking the payout for 64 straight years. Berkshire purchased its 400 million shares between 1988 and 1994 for around $1.3 billion, meaning it has benefited from decades of that growth.
Also, Coca-Cola's dividend amounts to a yield of 2.4%. However, that is for new investors. Berkshire will generate $848 million from the payout this year, amounting to a dividend yield for the company of 65%. Such a return arguably makes Coca-Cola stock too profitable to sell for Berkshire.
KO Total Return Level data by YCharts
Admittedly, the dividend is probably the main reason Berkshire still owns Coca-Cola shares. The stock dramatically underperformed the S&P 500 over the last 10 years. The company has also matured, leaving it with slower growth driven heavily by price increases. Furthermore, that has occurred as consumers increasingly turn away from its flagship product, seeking healthier drink options.
Fortunately, Coca-Cola stock has outperformed the S&P 500 over the last year amid strong pricing power, and a pivot into healthier drinks among its numerous beverage brands helped boost its top line.
NYSE: KO
Key Data Points
Investors should also remember that Berkshire is a long-term investor, so such challenges did not deter Buffett from holding Coca-Cola stock. Between its dividend and powerful brand, it's easy to see why Coca-Cola remains a core Berkshire Hathaway holding.
Greg Abel and Coca-Cola
Ultimately, Coca-Cola is probably too valuable to Berkshire for Abel to sell it.
Abel sold some of Berkshire's holdings as he took control of the company. Still, as a seasoned investor, Abel likely understands the value of a 65% dividend return and the Dividend King status. He also knows how brand loyalty and the ability to raise prices can benefit a stock, likely convincing him to leave Coca-Cola stock alone.
