Why Warren Buffett Loves Coca-Cola
There is little doubt that one of the very best investors of all-time is Warren Buffett. His investing style is suited perfectly to fit just about any economic environment over the long-term.
That’s because, to Buffett, all investing is value investing.
He buys a business that will grow over decades, at a time when other investors are either frightened or they don’t understand why it’s going to be such a good thing over the next 20 or 30 years. Then Buffett sits back and enjoys the revaluation of the stock, as the price investors are willing to pay for each dollar of earnings growth rises as the earnings number itself grows.
Buffett and Coca-Cola
A great example of this Coca-Cola (KO), which is Buffett’s oldest stock position at Berkshire Hathaway (BRK.B). It has provided some of the best returns, with the stock up well over 1,800% since he started buying it 35 years ago.
Warren Buffett first bought Coke stock from 1988 to 1989, scooping up more than 23 million shares. When he started buying in early 1988, many investors were still in shock from the Black Monday stock market crash of October 1987.
But not Buffett. Keep in mind that most Wall Street analysts at the time considered Coke to be a risky, non-Buffett type investment.
He defended the position in the 1988 annual Berkshire letter to shareholders with what would become one of his most famous aphorisms. In speaking about Coke, Buffett said: “…We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” True to his word, to this day, Berkshire hasn’t sold any of its Coca-Cola stock.
Berkshire Hathaway went on to more than quadruple its position, to 100 million shares by 1994. After two stock splits, the share count is now 400 million, but Berkshire’s cost basis has remained a mere $1.3 billion since 1994. And today, Buffett’s 9.2% stake in Coca-Cola is worth $24.1 billion.
But what about now – should he still hold on to his KO shares?
KO – the Cash Generation Machine
The answer is a resounding yes. Here's why. . . . .
Let me give you three basic number. . .14.9 times, 11 days, and 27.9%.
The first number is the number of times Coca-Cola turned over its working capital in 2022. Working capital is the amount of capital tied up in the day-to-day running of a company.
For a company like Coke, that means funding inventories (raw materials, finished goods, etc.) and the amounts owed by customers (receivables) minus what the company owes to its own suppliers.
Working capital is chiefly funded by short-term debt. So a company has the incentive to use it as efficiently as possible. The measure of that efficiency is the number of times in an accounting period – usually a year – that working capital is turned into sales. In 2022, Coca-Cola – with $43 billion in sales – turned over its working capital 14.9 times.
The rule of thumb is that the less working capital needed, leading to a higher multiple, the better. This is because efficiently using working capital is the key part of a company’s ability to generate cash. This is a company's cash-conversion cycle, when sales are turned into cash.
And here again, Coca-Cola's performance is outstanding. In 2022, its cash-conversion cycle took a mere 11 days. That was easily Coke's shortest cycle in the past 11 years and around a fifth of the company’s 52-day cycle in 2018!
That bring us to the third number. What’s really remarkable about Coca-Cola is that it runs on the cash-conversion cycle of a retailer (with chronically low profit margins), yet it generates high profit margins. Its profit margin was 27.9% in 2022.
Another attraction for Buffett is that Coke is a steady dividend payer. Its current annualized dividend is $1.84/share, which it raised from $1.76 in early 2023. The company has increased its dividend for 61 consecutive years, and has paid a dividend since 1920, making it a member of the S&P Dividend Aristocrats Index (NOBL).
I’d call Buffett's purchase of Coca-Cola a successful long-term investment! I believe KO is a buy anywhere around $60 a share.
