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Better Buy: Berkshire Hathaway vs. Coca-Cola

By Dan Caplinger - Mar 21, 2016 at 11:03AM

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Warren Buffett's company owns shares of the soft-drink giant, but which stock is the better deal right now?


Image: Coca-Cola.

Many people see Warren Buffett as one of the greatest investors of all time, and longtime shareholders in his Berkshire Hathaway (BRK.A 3.75%) (BRK.B 4.02%) have enjoyed strong returns over the years. Coca-Cola (KO 1.88%) has been one of Buffett's favorite stocks going far back in Berkshire's history, and despite some recent challenges, the soft-drink giant continues to work hard to find new opportunities in its industry. Still, many investors want to know which stock is a better buy right now. Let's compare Berkshire Hathaway and Coca-Cola on a number of metrics to see which is more worthy of your consideration.

Valuation
In terms of recent performance, Coca-Cola stock has done better than Berkshire Hathaway. Coca-Cola shareholders have enjoyed a gain of about 16% over the past year, compared to a slight loss of 2% for Berkshire's shares.

Because Berkshire Hathaway and Coca-Cola are in different industries, trying to compare them using the most common valuation techniques can lead to misleading results. For instance, based on trailing earnings, Berkshire trades at a multiple of around 15, compared to Coca-Cola's price-to-earnings ratio of about 27. Forward estimates show a slightly narrower disparity, with Coca-Cola looking more expensive at 22 times forward earnings compared to a figure of 19 for Berkshire Hathaway.

The biggest factor for Berkshire is that its extensive investment portfolio has a huge impact on its earnings. Investment-related gains and losses can make earnings much more volatile than you'll see at Coca-Cola, and so earnings comparisons have little meaning. Measuring on a book-value basis is equally fruitless, with Coca-Cola's stock trading at nearly eight times book compared to a ratio of less than 1.4 for Berkshire.

The first-glance impression that Coca-Cola is more expensive than Berkshire on a valuation basis is therefore inconclusive. Value investors have traditionally gravitated toward Buffett, and that might be the most important driver warranting a slight edge to Berkshire Hathaway.

Dividends
By contrast, on the dividend front, nothing could be clearer in comparing Coca-Cola with Berkshire Hathaway. Berkshire does not pay a dividend, while Coca-Cola has a long track record of plentiful and steadily increasing dividend payments that puts it among the top dividend stocks in the market.

Coca-Cola's current dividend yield of 3% is above the market's average and puts it among the top half of the Dow Jones Industrials. Moreover, it has raised its dividend payment annually for 54 straight years, putting it among the top dozen stocks in the market in terms of streaks of consecutive payout hikes.

Berkshire clearly sees the value of dividend stocks as investments, but in its defense, it would argue that the company would rather put dividend income back to work in Berkshire's own portfolio or in its operating companies rather than distributing it to shareholders. That has met with criticism among some, though, and if dividends are valuable to you, then Coca-Cola is the clear choice.

Growth
Measuring growth between these two companies is also a challenge, given the different circles in which they operate. However, Berkshire arguably has more capacity to grow simply because of its greater flexibility in moving into lucrative areas.

Coca-Cola has worked hard to try to make the most of opportunities in the beverage business. Despite facing a difficult situation with falling demand for its namesake sugary carbonated beverages, Coca-Cola has branched out into other areas, including still water, tea, and juices. Investments in Monster Beverage and Keurig Green Mountain have given Coca-Cola added exposure to the energy-drink and home-beverage markets, and these strategic partnerships have let Coca-Cola fully realize the value of core assets like its distribution network to boost its own prospects.

Berkshire Hathaway, on the other hand, has embraced companies in a wide range of industries. True to his value investing roots, Buffett has looked closely at the energy industry lately, trying to find companies that have been unfairly beaten down in the crude-oil plunge. Yet Berkshire's investments still span the entire market, ranging from its core insurance holdings to concentrations in consumer, financial, and industrial stocks. Investors are more optimistic about Berkshire's growth prospects, expecting a roughly 9% annual growth rate compared to just 2% for Coca-Cola.

Both Berkshire Hathaway and Coca-Cola have a lot going for them, and Warren Buffett clearly has confidence in both. Income investors can look to Coca-Cola for dividend income, but those favoring the full range of Buffett's expertise will probably prefer to go the Berkshire route.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.04 (1.88%) $1.16
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$417,401.43 (3.75%) $15,101.43
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$278.28 (4.02%) $10.76

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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