1 Stock Buffett Will Not Sell

Due to his tendency to hold stable, high-quality companies for extended periods of time, Warren Buffett has come to be associated with several top-performing stocks. One of the most famous Buffett holdings is Coca-Cola (NYSE:KO), a stock that in many ways exemplifies the legendary investor’s approach to buying shares. 

Remarkably, after all the decades owning Coke, Buffett has not sold a single share. But why? What is it that makes Coca Cola stock so special to Buffett?

How Much KO Does Buffett Own?

Warren Buffett’s Berkshire Hathaway owns roughly 400 million shares of Coca-Cola, a stake valued at $23.57 billion.

KO is the fourth-largest holding in the Berkshire portfolio, coming in behind Apple, Bank of America and American Express.

Although Coke isn’t Buffett’s largest holding, it does have the distinction of being his most time-tested. Berkshire Hathaway has held Coca-Cola shares for over 35 years.

Because of the time period in which Buffett began acquiring his KO holdings, the cost basis for the shares is a remarkably low $3.25 per share.

With shares currently trading for over $60, Buffett as made nearly 20 times his initial investment by holding the stock over the last several decades.

Coca-Cola Is the Ultimate Buffett Moat Stock

Warren Buffett is famous for investing in stocks that have what he calls a moat, or a unique competitive advantage  and Coca-Cola is perhaps the ultimate example of this due to both its scale and its universal brand recognition.

Consumers buy about 2.2 billion units of the company’s products worldwide every single day, making them a ubiquitous aspect of life in practically every country on Earth.

Buffett even goes so far as to use Coca-Cola as an example when explaining the value of brands and consumer preference. Buffett has described the company as an “inevitable,” or a business that has absolute dominance within its industry.

In Buffett’s view, Coca-Cola has built up a brand dominance so powerful and a delivery infrastructure of such scale that no other company will ever reasonably be able to challenge it for the leading position in the soft drink market.

Coke’s competitive moat also gives it robust pricing power, allowing it to remain profitable even at times when companies struggle.

In its most recent quarter, for instance, the company topped revenue estimates despite lower-than-expected volume. This was a result of price increases that kept Coca-Cola from losing ground.

As Buffett has observed in the past, consumers will always pay a small premium to drink Coca-Cola in favor of other soda brands that may be slightly less expensive.

Buffett Got the Right Price for KO

As a noted value investor, Warren Buffett seeks out stocks that are trading below their intrinsic value. The Oracle of Omaha has observed many times that patience is key in investing, as the market won’t always bring spectacular deals. Major upheavals, however, can create a slew of investment opportunities.

This was, in large part, the case for Coca-Cola. Buffett initially bought the stock in 1988, coming off of the 1987 market crash.

Like many other stocks, KO sold off heavily during this crash, even though its business was still in excellent shape and its market dominance was unquestionable.

Seeing the value in the oversold stock, Buffett decided to take a stake that has gradually grown into one of Berkshire Hathaway’s largest holdings.

This approach to buying stocks during periods of heightened volatility goes back to a lesson famously taught by Buffett’s investing mentor, Benjamin Graham.

In his landmark book The Intelligent Investor, Graham explains market volatility using a character named Mr. Market. On any given day, Mr. Market will offer to buy or sell an asset at a different price.

When the price is significantly lower than the reasonable value of the asset, investors should take advantage of Mr. Market’s mood and buy. When the price soars above that reasonable value, investors can take advantage of the market by selling.

KO Showcases the Power of Dividend Growth

While Berkshire Hathaway has famously resisted paying a dividend, many of the top stocks in its portfolio produce significant streams of income via dividend distributions. In KO’s case, the stock currently yields 3.04 percent, paying $1.84 annually per share.

The yield on Buffett’s stake in the company, however, is much higher when its cost basis is taken into account. Buffett paid an average of $3.25 for his KO shares. As such, his stake yields an impressive 56.6 percent on cost.

Given that Coca-Cola has raised its dividend for 63 consecutive years and Berkshire clearly has no intention of liquidating its stake in the company anytime soon, it’s highly probable that this yield rate will only continue to rise.

Is Coca-Cola Still a Good Buy?

While today’s investors obviously won’t see the kind of gains Warren Buffett has realized by holding Coca-Cola as it expanded to its current size, there is still a compelling argument to be made for buying the beverage giant.

The moat that originally attracted Buffett to the company has, if anything, only become stronger over the years, and there is a minuscule chance that another soft drink company could unseat Coke at the top of the industry.

The stock’s high dividend yield also makes it an attractive choice for investors seeking stable, reliable income from their stock portfolios.

With over six decades of dividend increase history, management is highly unlikely to let Coke’s dividend growth stop in the near future. Forward growth may be slower than it was in the past, but there seems to be little risk of distributions falling or plateauing.

Coca-Cola also continues to trade at a fairly reasonable price, though it’s unlikely to be undervalued. KO shares are priced at 21.5x forward earnings, just over the S&P 500 average of 20.5. Given the company’s quality and proven ability to grow its earnings over time, this is likely a fair premium for investors to pay.

Overall, Coca-Cola stands now as a moderate buy for conservative investors at the moment. The returns from the stock likely won’t be massive, but the company appears to be in a good position to continue its steady, stable growth for the foreseeable future. As a result, KO still appears to be a stock that can produce positive compounded returns for many years to come.

---

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.