Coca Cola (NYSE:KO) has a long been a favorite of the world’s most successful investor, Warren Buffett. When he first purchased shares, the company was a fledgling of what it has become today. Now the Coke empire spans 500 beverage brands from its flagship Coca Cola to Minute Maid.
Indeed the investment has been so successful for Buffett that he earns an astonishing 57% annually in dividend yields on his original principal, far outstripping his yield on any other investment.
For decades, Coke has held a position in his portfolio but, all these years later, does it deserve a place in yours?
Here’s what you may not know about Coke that could drive up its share price:
1. Diversification Into Non-Carbonated Beverages
For years, Coca-Cola has been expanding beyond carbonated beverages to non-carbonated sodas and drinks. Among its most famous is its entrance to the bottled water industry, but it also has exposure to tea, coffee and dairy products.
In 2019, Coca Cola made a splash by acquiring Costa Coffee for $5.1 billion. This was largely a bet on the growth of the coffee market, which is forecast to expand annually at a rate of 4.7% through 2030.
2. Coke Is A Tech Play on Big Data
When you think of Coca Cola, it’s easy to bucket it into the category of a century-old company that makes, manufactures, and distributes cans of soda but it’s also a technology play on big data and consumer analytics.
To get insights and and an edge on competitors, Coke uses artificial intelligence to gather big data insights on consumer behaviors and beverage market trends.
For example, fast-food restaurants with soda machines aren’t just pouring out cups of soda but gather data on every pour. Are consumers leaning towards one flavor or another? Analysts at Coca Cola are constantly absorbing the data and crunching through it to make smarter decisions about which products deserve more investment to expand their market shares, and which ones may be on the decline.
3. Smart Recycling To Lower Costs
With an ever-growing consciousness about how important recycling is, Coke is leading the way in the beverage sector by setting a goal to collect and recycle all of its packaging by 2030.
Of course this is helpful from a public relations standpoint, but it also makes for smart business because, in the long run, the company can save on costs by using recycled materials.
That in turn should help Coke to improve its already lofty margins that are the envy of most any business. For example, in its most recent quarter, Coke reported gross margins of 59%. Even Apple doesn’t have margins as impressive as that – it’s gross margin last quarter was 44.5%.
4. Local Customization
Like McDonald’s, Coca Cola is very tuned into local tastes and preferences. For example, it offers Inca Kola in Peru and Thums Up in India.
From Tanzania to Texas, Coca Cola has made a splash but management realizes to capture local trends, these adaptations to each market are crucial to build diversified revenue streams that expand the company’s already wide moat.
The nod to each geography further heightens customer and brand loyalty, which in turn increases customer lifetime value. In India, Coca Cola had a 60.5% share of the soft drinks market but discovered that, largely, the massive penetration was due to Thums Up, which if removed would sink its share below 30%.
5. Direct-to-Consumer Channels
The average consumer probably still buys their favorite Coca Cola beverage from a retail store, whether that’s Target or Walmart, or a local 7-11.
What they probably don’t know is that the beverage giant has launched a direct-to-consumer online store that allows for even better data collection.
The company’s ability to nudge consumers towards seasonal products and push exclusive deals as well as its other brand offerings is heightened through this D2C approach too. Plus, it adds yet another revenue source to the company’s top line.
Coke Revenues Just Keep Growing
For the past 10 quarters, KO revenues have been steadily growing on a year-over-year basis. The last quarter of negative growth was reported in Q4 2020 but since then through Q2 2023, revenues have soared from $8.6 billion to $11.9 billion.
So too have operating margins increased impressively over that time from $2.5 billion to $3.7 billion.
Indeed annual operating margins have soared over the past 3 years from $9.9 billion in 2020 to $11.4 billion in 2021 and $12.2 billion last year.
Analysts forecast by 2025, operating income will continue its upward trajectory to $15.5 billion.
Is Coca Cola a Good Stock a Buy Now?
With revenues forecast to rise by 10% over the next couple of years and operating margins expected to rise by almost 25%, analysts expect KO share price could rise as high as $69.71 per share, a 17% rise from current levels.
Coca Cola remains a good stock to buy now because it’s undervalued, continues to grow steadily, and has an attractive 3.18% dividend.
Those buying Coke for its dividend can feel comfortable that that company has been paying out dividends for over half a century and has a payout ratio of 56%, which is on the higher side, but by no means threatens the sustainability of the dividend.
Who Owns the Most Shares of Coca Cola?
Coca-Cola attracts some of the world’s largest investors. Institutional ownership of Coca Cola stands at 70.4% currently.
Berkshire Hathaway is the company’s biggest shareholder. It owns 400 million shares in Coca-Cola – that is over 9% of the company. While other owners tweak their holdings slightly throughout their investments, Berkshire Hathaway has been fairly consistent. It owns 400 million shares, exactly.
With such a large stake in the company, Buffett is likely unconcerned about short-term sales declines. This is a long-term position for Berkshire Hathaway.
Buffett has been buying shares in the beverages company for a long time – since 1988 to be exact. In 1989, Buffett increased the number of shares Berkshire Hathaway owned in Coke to 23.35 million from 14.17 million. By the end of that year, its stake in Coca-Cola was valued at $1.8 billion and it only cost Buffett $1 billion to do it. In fact, Coke was the only major holding Buffett increased that year.
The famed investor saw an opportunity in the beverages company and grabbed it. Buffett recounted in a 1989 letter to shareholders: “it was in 1936 that I started buying Cokes at the rate of six for 25 cents from Buffett & Son, the family grocery store, to sell around the neighborhood for 5 cents each. In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product.”
That formula that makes Coke work as a company and an investment hasn’t changed.
The Vanguard Group has a 369 million share stake. Blackrock, State Street and Geode Capital round out the top 5 with 302 million shares, 171 million shares and 79 million shares respectively.
Will Coca Cola Stock Go Up?
When we ran a discounted cash flow forecast analysis of Coca Cola, we arrived at fair value of $62 per share, suggesting about 7% upside now.
The company is trading at a relatively lofty 23x multiple on earnings, above the benchmark 20x multiple that we typically see in the S&P 500.
That suggests Coke may be quite fully valued at this time, so it’s currently more attractive, in the near-term, as an income play than a bet on share price appreciation.
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.