During the late 1980s, Warren Buffett sought and obtained a rare concession from the Securities & Exchange Commission (SEC) that allowed him to delay public disclosure of his stock purchases for an entire year. The rationale behind this request was his belief that his strong reputation as an influential investor could sway stock prices undesirably if information about his investment choices became public prematurely.
Complying with his request, the SEC granted forfeiture of timely reports on Berkshire Hathaway's significant acquisition. Consequently, shareholders attending the 1988 annual meeting were unaware that Buffett had quietly purchased 14 million shares in a single company that had recently captured his interest. The sole indication of this activity was the uncharacteristic choice of beverage at the gathering; Buffett was said to prefer Coca-Cola over his usual PepsiCo cherry soda.
Detailed biographies reveal that Buffett had long admired Coca-Cola but was hesitant to invest due to valuations he considered high. It was only after a competitive pricing battle between Coca-Cola and Pepsi that Coca-Cola’s share price declined to approximately $38 per share, tipping the scales in favor of investment.
Motivated by this opportunity, Buffett initiated an investment of $600 million, embracing a strategy of incremental purchases rather than a lump sum acquisition. By finalizing his buying activities around 1994, Berkshire Hathaway had amassed 400 million shares at a cumulative cost of $1.3 billion.
Adjusting for subsequent stock splits, this position corresponded to an average purchase price near $3.25 per share, a bargain compared to later market performance. Since then, the value of Coca-Cola’s stock increased over 2,000%, coupled with annual dividend income that reached $816 million, yielding a remarkably profitable return on the original investment.
Despite these impressive historical returns, Buffett has not expanded the Coca-Cola holding since 1994, nor has he sold any shares. This raises the question of Coca-Cola’s present status as an investment option decades after its initial acquisition.
In the 2022 Berkshire Hathaway shareholder letter, Buffett cited Coca-Cola alongside American Express as prime examples of the company’s "secret sauce," which fueled extraordinary compounded returns nearing 3,787,464% since 1965. He emphasized the substantial dividends generated, highlighting a $702 million dividend payout from Coca-Cola shares that year - an equivalent of nearly 50% yield relative to the original investment. This income was expected to grow, and subsequent data confirm that dividend payments increased to $816 million annually within three years.
Recently, Coca-Cola declared its 63rd consecutive annual dividend increase, underscoring its reputation as a "Dividend King" with strong management focus on sustained shareholder returns. The company's current dividend yield stands at approximately 2.9%, significantly above the S&P 500 average of 1.14%, indicating above-average income opportunities for investors.
Operationally, Coca-Cola reported a 30% growth in earnings per share last quarter and cash flow from operations totaling $3.65 billion. This operational cash flow supports dividend payments and other financial activities. With 4.3 billion shares outstanding, Coca-Cola’s quarterly dividend costs approximately $2.19 billion, consuming about 60% of available operating cash flow.
Having 40% of cash flow remaining post-dividends presents notable financial flexibility, especially given the company’s environment of expanding profit margins. This surplus offers the potential for further dividends, share repurchases, or investment in business development.
In summary, Coca-Cola appears poised to continue its pattern of dividend growth, aligning with Berkshire Hathaway’s long-term expectations of sustained cash generation. However, from a capital appreciation perspective, Coca-Cola’s performance lags behind broader market benchmarks, appreciating approximately 55% over the past decade versus 223% for the S&P 500. Given Coca-Cola’s already dominant position in its sector, it now primarily represents a mature, income-oriented stock rather than a growth vehicle.
For investors prioritizing income over capital gains, Coca-Cola’s steady dividend stream and likelihood of future increases render it an attractive and prudent choice. Conversely, those seeking dynamic capital growth may find other options more fitting for their investment goals.