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Why the Coca-Cola stock is one of Warren Buffett’s best investments

Coca-Cola has been championed by Berkshire Hathaway for decades, with the stock’s steady dividend and strong consumer engagement making it a recession-proof pick.

As a brand, Coca-Cola [KO] is arguably one of the biggest household names, but as a listed company, it hasn’t always got investors excited. Yet, legendary investor Warren Buffett has a taste for the company.

His firm Berkshire Hathaway [BRK-A] first scooped up around 23 million Coca-Cola shares a few months after Black Monday in 1987. By the mid-1990s, Buffett had accumulated 100 million shares in the company. While no additional have been purchased since then, two two-for-one stock splits in 1996 and 2012 mean Berkshire Hathaway now holds 400 million shares. As of the end of 2021, this stake was worth $23.7bn, a 1,723% increase on the $1.3bn purchase price.

Coca-Cola is Berkshire Hathaway’s fourth most valuable holding after Apple [AAPL] ($161.1bn), Bank of America [BAC] ($46bn) and American Express [AXP] ($24.8bn).

While Buffett has been bullish on the stock for some time, there are several reasons to be positive about Coca-Cola amid the market shift to non-cyclical stocks. The company’s steady dividend and strong brand loyalty has inspired confidence among analysts, and it is considered potentially recession-proof.

 

Steady dividend the recipe to its success

The secret ingredient to the success of the Coca-Cola investment is that Buffett has never sold a share — and doesn’t intend to. “[W]hen we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever,” he wrote in his 1988 shareholder letter, explaining his decision to purchase the stock.

Such is Buffett’s love for the company that he previously abstained from a shareholder vote on a controversial equity compensation plan. “I love Coke, I love the management, I love the directors, so I didn’t want to vote ‘No’,” he told CNBC in 2014.

The stock has consistently paid out a quarterly dividend over the years: its current yield is 2.9%. The most recently announced dividend, to be paid in July, is $0.44 per share, equivalent to an annual dividend of $1.76 per share, up 5% from the $1.68 per share paid out in 2021.

There’s also a long-standing argument that the stock is recession-proof. Although consumers may be tightening their purse strings amid the rising cost of living, Coca-Cola’s ubiquitous appeal means it’s still likely to shift plenty of its products.

Coca-Cola boosted by analysts’ optimism

The Coca-Cola share price is up 1.5% year-to-date to $59.23 through the close on 14 June and has gained 10.2% in the past year. For comparison, the PepsiCo [PEP] share price is down 6.8% and up 11.1% in the respective periods.

The Coca-Cola stock climbed 1% in intraday trading on 13 June on the back of two promising developments. Morgan Stanley analyst Dara Mohensian reiterated an ‘overweight’ rating and $76 price target on the stock in a research note published that day.

“We continue to have a high degree of conviction that Coke will post above-consensus topline growth in both 2022, updating our existing analysis, as well as in 2023, with new detailed line-item analysis,” Mohensian said, noting that the company’s pricing power and post-Covid recovery gives it better near-term visibility than its peers in the consumer goods space.

The same day, Coca-Cola announced it was teaming up with Brown-Forman [BFA] to launch a pre-mixed cocktail drink with Jack Daniel’s Tennessee Whiskey, with the initial rollout planned to begin in Mexico later this year. The product will be the fourth alcoholic beverage in Coca-Cola’s portfolio in under two years, tapping into the growing pre-mixed drink market.

No signs of deflation

Bernstein held Coca-Cola CEO James Quincey at its 38th Strategic Decisions Conference at the start of the month. Following his appearance, analyst Callum Elliot noted that the company was showing no signs of coming under pressure.

In a note to clients seen by Investing.com, Elliot said “this positivity was aligned with the upbeat tone from other [consumer packaged goods] companies” such as Clorox [CLX], Estee Lauder [EL], Mondelez [MDLZ] and Kraft Heinz [KHC].

“We think we’ve seen a fundamental shift in Coca-Cola’s consumer engagement, with the Real Magic platform, leading to better engagement of younger consumers with Fortnite partnerships, fashion crossovers and limited-time flavours,” Elliot added.

 

 

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