How Much Coca Cola Stock Does Berkshire Own? Berkshire Hathaway, the holding company led by the legendary Warren Buffett, rarely ends the year on a sour note. However, 2020 has presented a number of extraordinary challenges.
Will Berkshire Hathaway still be able to return a profit? How will Berkshire Hathaway’s substantial investment in Coca Cola play into these results?
Buffett’s Coca Cola Investment Thesis
Warren Buffett is known as one of the most successful investors of all time. He ignores fads in favor of a reliable portfolio strategy that has seen him through more than 50 years of market ups and downs.
Every year, Buffett writes a letter to shareholders that offers insight into his investment philosophy. His discussion of Coca Cola is particularly interesting, because it illustrates the method that delivers Berkshire Hathaway’s consistent results quarter after quarter.
When the stock market crashed in 1987, the Dow Jones Industrial Average (DJIA) declined by 31 percent. For perspective, the 2020 market crash caused a drop of 28 percent. Investors panicked, and they started selling their holdings in all sorts of companies, giving little thought to which were well-positioned to recover and grow.
Coca Cola shareholders got caught up in the selling frenzy, but Buffett recognized a perfect opportunity to buy. He saw something his peers overlooked: the exceptional value of the Coca Cola brand.
In 1988, when Buffett started buying Coca Cola shares, the company was valued at just $14 billion. Buffett did some quick calculations and determined that a mere one cent increase in the per-serving price of Coke products would generate $2 billion in pre-tax earnings.
Buffett banked on a key component of Coca Cola’s long-term leadership in the beverage market: Consumers would continue to buy at the same quantity, even if they had to pay a little more. He wasn’t guessing – he simply looked at the company’s history. In its 100-plus years, it was able to retain market share, even when per-item prices increased.
Other investing giants avoided Coca Cola, believing it was overvalued in light of its earnings history. That was a mistake they would come to regret, given the realization of Buffett’s predictions.
The thing is, when it comes to Coca Cola, it’s never too late to buy. In addition to other growth and expansion strategies, Coca Cola continues to boost its bottom line with small, regular increases in its price structure. Those who were willing to buy and hold Coca Cola shares at any point in its history have seen them grow in value over the long-term.
That’s particularly important today, as Coca Cola faces challenges given current economic conditions. Smart investors are following Buffett’s lead by purchasing stock while it is at a relative discount.
Berkshire Hathaway 10-Year Share Performance
Clearly, given his results, Buffett’s instincts are accurate when it comes to choosing investments for Berkshire Hathaway.
In January 2010, Berkshire Hathaway share prices hovered around $100,000. By January 2020, they were closer to $345,000.
It’s true that values dropped, along with the rest of the market, in March 2020, but the bottom was still impressive: $239,440 as of March 23, 2020. More importantly, it appears that Berkshire Hathaway’s recovery will be swift. As of August 2020, stock prices are up to $311,027.50.
It’s easy to see how Coca Cola has contributed to Berkshire Hathaway’s returns. When Buffett bought in 1989, his 23.35 million shares were worth $1.8 billion. Since then, Coca Cola has delivered a 1,750 percent increase in value.
Berkshire Hathaway increased its Coca Cola holdings to $100 million shares in 1994. Since then two stock splits resulted in a total of 400 million shares.
The cost basis of Berkshire Hathaway’s Coca Cola shares is approximately $1.3 billion, and they are currently worth around $20 billion. That is a substantial gain in itself.
If dividends are added into the equation, total returns are even more extraordinary. Berkshire Hathaway has already earned approximately $7 billion in dividends from this investment, and it appears likely that the next 12 months will add an additional $640 million or so to that total.
Berkshire Hathaway Valuation Vs Coca Cola
Today, Berkshire Hathaway is valued at $492.46 billion, while Coca Cola is down to $203.09 billion. However, Buffett doesn’t appear concerned.
It’s true that Coca Cola is in a tight spot as a result of the novel coronavirus, but the factors contributing to lost value are likely only temporary.
The biggest issue is that Coca Cola generates substantial revenue from large events, which are currently banned in most major markets.
Until a COVID-19 vaccine is ready for widespread distribution, it is unlikely such events will resume. With that said, they will resume eventually, and Coca Cola’s sales will recover quickly when that time comes. Meanwhile, the company is expanding its line of products for home use to make up some of the difference.
Buffett knows that consumers will continue to buy Coca Cola products whenever and wherever they are available, and they will pay a higher price if necessary. That’s why he hasn’t considered selling off any part of Berkshire Hathaway’s stake in Coca Cola, despite the company’s tough year.
Will Berkshire Hathaway End the Year in the Black?
It’s difficult to say whether Berkshire Hathaway will end the year in the black, as there are so many unknowns when it comes to COVID-19.
Some scientists have predicted a large wave of new cases this fall, which could trigger additional stay-at-home orders and more shuttered businesses. That could lead to another dramatic market decline.
On the other hand, a safe, effective vaccine could be announced any time, which is likely to prompt an impressive market rally. That, in addition to the upcoming US Presidential election, leaves every possibility open.
The details and timing of these factors will determine whether Berkshire Hathaway can produce a profit in 2020, but regardless, investors have expressed their continued confidence in the stock.
If anyone can produce positive results in the midst of so many upheavals, it is Buffett – and if he can’t manage it this year, it’s likely those profits will return in the months that follow.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.