Given his fantastic track record of compounding capital as the CEO of Berkshire Hathaway, Warren Buffett is an investing legend. It makes sense that both professional and amateur investors follow his portfolio closely to find new potential ideas for allocating their money.
Among the dozens of companies that Buffett owns, there’s a top beverage stock that has dropped in recent months and is now trading 14% off its September all-time high. Does this mean that it’s time to buy this business before 2025?
It’s all about quality
Berkshire Hathaway and Warren Buffett have held a stake in Coca-Cola (KO 0.74%) for about four decades. Today, it represents 8.4% of the conglomerate’s public equities portfolio. It doesn’t take much to understand some notable characteristics that make the soft-drink giant a high-quality enterprise.
Coca-Cola has a durable competitive advantage with its brand name. With a presence in more than 200 countries and territories across the globe and 40% market share of the non-alcoholic ready-to-drink industry, the business is highly regarded by consumers who have come to trust the consistency that Coca-Cola offers.
One important trait Buffett considers is if a company has the ability to consistently raise prices, otherwise known as pricing power. Coca-Cola fits the description. Last quarter (Q3 2024 ended Sept. 27), unit volume dipped 1% year over year but was offset by a 10% price increase. Management has the ability to fight off inflationary pressures by asking customers to pay more over time. Not a lot of companies are so fortunate.
In addition, Coca-Cola is extremely profitable. In the past decade, its operating margin has averaged a superb 26.8%, showcasing how much of its sales base flows down to the bottom line.
All of these positive attributes are likely the key reasons Berkshire has been a longtime shareholder in Coca-Cola. I’d also argue that the fact that this is such a boring business also contributes to Buffett’s positive view. There’s virtually zero risk that the company will be disrupted anytime soon — if ever.
In other words, there’s no threat of obsolescence, which can be viewed favorably in today’s fast-changing and tech-driven economy. This also adds a high level of predictability to Coca-Cola’s business model, making the leadership team’s job that much easier for strategic decision-making.
Not a market outperformer
Coca-Cola might dominate the worldwide beverage industry, but that doesn’t mean it’s been a winning investment. In the past five- and 10-year periods, the shares have generated total returns of 33% and 105%, respectively. These figures seriously lag the broader S&P 500‘s performance during those two stretches of time.
Of course, this can be blamed on Coca-Cola’s low growth prospects. The market it operates in doesn’t expand by much in any given year, as it’s extremely mature. That doesn’t give the business lots of room to increase revenue in any significant way.
Even after the latest 14% dip, the stock looks fully valued. Shares trade at a price-to-earnings ratio of 25.8, which is slightly more expensive that the overall S&P 500. That’s certainly not a bargain opportunity.
Therefore, I firmly believe that Coca-Cola only makes sense for one specific type of investor — someone who prioritizes dividends. The current dividend yield of 3.1% is compelling, providing a nice income stream.
Even more impressive is the company’s historical track record. Earlier this year in February, the company increased its dividend payout, marking the 62nd straight year of an increase. That’s an unbelievable accomplishment.
Coca-Cola isn’t likely to outperform the S&P 500 over the long term. But if you appreciate dividends, then the stock should be on your radar as a potential buying opportunity before the start of 2025.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.