The New Year is here, and Warren Buffett has more than $35 billion staked in three companies that are household names.
At the end of the third quarter, Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) -- Warren Buffett's company -- disclosed it had a $17 billion stake in Coca-Cola (NYSE:KO), a $13.4 billion position in IBM (NYSE:IBM), and roughly $5 billion in Wal-Mart (NYSE:WMT). All signs indicate Buffett will continue to hold them into 2015 and well beyond.
Berkshire's beloved beverage
Berkshire Hathaway owns 400 million shares of Coca-Cola that were acquired between 1988 and 1994, representing an ownership stake of just over 9% of the company. The position cost just $1.3 billion, but it is now worth $17 billion -- meaning if any shares were sold, a sizable chunk of the gains would have to be paid to Uncle Sam.
But that's not the only reason Buffet remains such a massive investor in the company. In 2014 alone, Berkshire collected nearly $500 million in dividends from Coca-Cola.
Yes, the company has faced some troubles in recent years -- a Gallup poll recently found 63% of Americans said they avoid drinking soda versus just 41% in 2002 -- but we learned in April 2013 why Buffet has zero intention of selling a single share of Coca-Cola. In fact, Buffett told Coca-Cola's CEO Muhtar Kent at its 2013 annual meeting:
I'm the kind of guy who likes to bet on sure things. No business has ever failed with happy customers... and you're selling happiness. I like wonderful brands. If you take care of a great brand, it's forever.
Buffett's onto something here. Of the 111 brands Coca-Cola controls, 17 have an estimated value higher than $1 billion. With its dividends and massive competitive advantage, it's no wonder Buffett is betting big on Coca-Cola this year and for many more to come.
The market laggard
Coca-Cola is the second-largest position in the Berkshire Hathaway portfolio; next on the list is IBM. And while it seems insensible, Buffett is actually thankful IBM has lagged the market Berkshire first began amassing its stake.
How is this possible? Well, Buffet views his ownership positions in companies like IBM as direct ownership of their earnings through their their operations and not just numbers on a screen.
Since IBM has been aggressively repurchasing its shares -- to the tune of nearly $55 billion since 2011 -- its income from continuing operations essentially haven't budged over the last three years while the earnings attributable to Berkshire based on its year-end ownership have risen by nearly 30%:
Of course, Buffett will likely reevaluate Berkshire's stake in IBM if its business operations start to disappoint -- through the first nine months of 2014, its earnings per share from continuing operations was up 5% -- but the disappointing performance of its stock has little to do with how he views the company itself.
The big box
The final and most interesting stock that Buffett's betting big on is Wal-Mart, the fifth-largest position of Berkshire Hathaway.
Through the first nine months of 2014, Berkshire steadily added to its stake in the retailer, buying nearly 10.5 million more shares, which likely cost a little more than $750 million. In light of Wal-Mart's unimpressive growth prospects, some were wondering what Buffett was thinking.
Yet in the third quarter, there were signs of optimism as the retailer posted comparable-store sales growth of 0.5% -- the first time in seven quarters its same-store sales rose.
In addition, as fellow contributor Dan Caplinger notes, the company's stock soared in November thanks to impressive gains in its online sales. And Wal-Mart's smaller Neighborhood Market stores are performing admirably with comparable-store sales rising 5.5%.
Questions still remain about what the future holds for Wal-Mart, but all signs indicate the company isn't a write-off just yet.
The bottom line
In his 2007 letter to Berkshire Hathaway shareholders, Buffett said:
Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding.
The reality is, Coca-Cola, IBM, and Wal-Mart all fit that mold. It's no wonder Buffett is betting big on them this year and likely will for years to come.