Warren Buffett, the legendary investor and chairman of Berkshire Hathaway (NYSE:BRK.B), is renowned not just for owning a myriad of private businesses like Geico, Duracell, and BNSF Railway, but also for holding a significant portfolio of publicly traded stocks.
One of Buffett’s most iconic and enduring investments is Coca-Cola (NYSE:KO). Back in 1988, Buffett purchased a staggering 400 million shares of Coca-Cola, making it a cornerstone of Berkshire Hathaway’s portfolio.
Today, Coca-Cola represents 8.9% of Berkshire’s portfolio, with the conglomerate owning about 9.1% of all outstanding Coca-Cola shares.
Inspired by the “Oracle of Omaha,” I’ve also decided to make Coca-Cola a permanent fixture in my investment portfolio. Here’s why I believe Coca-Cola is a stock to buy and hold forever.
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It’s a wonderful, high-quality company
Warren Buffett’s investment philosophy took a pivotal turn when his late partner, Charlie Munger, persuaded him to shift from buying undervalued “cigar butt” stocks to focusing on high-quality companies with enduring competitive advantages.
This shift is epitomized by Buffett’s investment in Coca-Cola, which aligns perfectly with this approach.
Coca-Cola’s business model, known as the “Coca-Cola System,” is a key part of its success. This system involves the company manufacturing its syrup inexpensively and then selling it to various bottlers that have exclusive territorial rights.
This arrangement allows Coca-Cola to leverage its brand while minimizing its production and distribution costs, leading to exceptionally high margins.
For instance, Coca-Cola boasts a profit margin of 22.9% and an operating margin of 32.5%. These margins are significant as they reflect the company’s efficiency and ability to generate profit from its core operations.
Additionally, Coca-Cola’s return on equity (ROE) stands at an impressive 38.8%. ROE is a measure of financial performance calculated by dividing net income by shareholders’ equity. Essentially, it indicates how effectively management is using a company’s assets to create profits.
A high ROE, like Coca-Cola’s, signifies a productive company with the potential for high profitability relative to the money that shareholders have invested. This metric is crucial for understanding the sustainability and growth potential of a company’s business model in the long run.
It’s trading at a fair value
When it comes to buying high-quality companies like Coca-Cola, one crucial factor to consider is ensuring you pay a fair price. Overpaying for even the highest quality stocks can diminish your returns, no matter how strong the company’s underlying business may be.
Currently, Coca-Cola is trading with a forward price-to-earnings (P/E) ratio of 22.7. This metric evaluates a company’s current share price relative to its per-share earnings. A forward P/E uses forecasted earnings, which provides insight into how the market values the company’s future growth prospects.
Taking the inverse of this P/E ratio gives us the earnings yield, which stands at 4.4% for Coca-Cola. This yield represents the percentage of each dollar invested that is earned back as profit.
When we compare this yield to the current yield on a 10-year U.S. Treasury bond, which is 4%, Coca-Cola’s stock appears attractively priced.
Treasury bonds are often considered a low-risk investment, so when a company’s earnings yield is higher, it suggests that the stock can offer better returns relative to this lower-risk alternative, especially when interest rates are expected to decline.
Moats, dividends, and splits
Coca-Cola’s management has meticulously nurtured an ecosystem that has supported the company since its inception in 1886, bolstering its standing in the global market through strategic branding, dividends, and share splits.
Firstly, Coca-Cola boasts a wide economic moat, largely thanks to its formidable brand recognition. With a portfolio that includes familiar names like Powerade, Sprite, and Fanta, Coca-Cola beverages are enjoyed worldwide.
Secondly, Coca-Cola is notable for its robust dividend history. It has increased its dividend for 62 consecutive years, with an average annual growth rate of 3.8% over the past five years.
Presently, KO offers a yield of 2.7%. It’s a revered “Dividend King,” a title reserved for stocks with 50-plus years of consecutive dividend increases.
Lastly, Coca-Cola’s history of share splits has significantly increased the number of shares owned by long-term investors. A single share purchased in 1919 would have split into 9,216 shares today
