Warren Buffett is one of the better-known and successful investors. His Berkshire Hathaway (BRK.A 1.42%) (BRK.B 1.11%) portfolio has consistently outperformed the S&P 500 (^GSPC 1.00%) since its inception in the mid-1960s. So respected is his reputation that some investors will assume a stock belongs on a buy list simply because Berkshire owns shares.
That may not be the case with Coca-Cola (KO 0.74%). Despite being a long-held position of Berkshire and a globally known iconic brand, the company’s growth track and financials indicate it is not likely to serve new investors as well as it did Buffett and his team. Here’s why.
Coca-Cola as a Buffett holding
Berkshire Hathaway acquired 400 million Coca-Cola shares in various lots between 1988 and 1994. By any measure, Buffett’s investment instincts have paid off for Berkshire. The investment holding company spent around $1.3 billion to acquire its shares. After over 30 years of appreciation, those shares are now worth around $25 billion.
However, that is not the extent of Berkshire’s returns. The company pays $1.94 per share in annual dividends, and because these increases have occurred for 62 straight years, the payout has become a lucrative cash source for Buffett’s company.
New shareholders would earn a dividend yield of about 3.1% on shares purchased today, far above the S&P 500’s 1.25% current average.
Still, Berkshire’s long-term ownership brings a significantly higher return. Its 400 million shares generated $776 million in dividend income in 2024. Thus, its annual dividend yield on cost averages almost 60% of its initial investment cost! Moreover, Coca-Cola will likely hike the payout for a 63rd year in February to maintain its Dividend King status, meaning Berkshire should continue to profit handsomely from the payout.
Why now is likely not a good time to buy
Still, rather than focusing on following Buffett, investors should ask the more pertinent question of why his team has not added shares in over 30 years.
That likely comes down to the company’s growth prospects. Its flagship beverage is in the enviable position of being available in nearly every country in the world. Unfortunately for the company, this leaves little room for additional significant growth for Coca-Cola. Hence, it drives most of its expansion through the acquisition of other brands.
To its credit, it saw this early and acquired its first brand, Minute Maid, in 1960. Coca-Cola has gone on to purchase over 200 brands and has also ventured into alcohol with its Topo Chico hard seltzers.
Unfortunately for prospective shareholders, Buffett’s inclination to not buy proved correct, as these other brands did not bring rapid growth. Since the beginning of 1995, the total returns of the S&P 500 have been more than double that of Coca-Cola.
KO Total Return Level data by YCharts
Nonetheless, Buffett’s team has chosen to stay in the stock. Although Buffett has spoken of Coca-Cola’s competitive advantage and adaptability, the dividend income is a more likely reason Berkshire has held its shares.
Moreover, Berkshire Hathaway holds a record liquidity of over $325 billion. That indicates it does not see any stock worth buying at the moment, so holding shares for the dividend may be a better use of its capital.
Do not add shares of Coca-Cola
Despite Berkshire Hathaway’s long-held position in Coca-Cola, it is likely one the average investor does not want to copy. Indeed, Coca-Cola is one of the world’s most highly recognized brands, and its dividend yield far exceeds S&P 500 averages.
Unfortunately, the most interesting fact about Buffett’s Coca-Cola holding is arguably the inaction over the last 31 years. Although standing pat led to a steadily rising stream of dividend income, it also meant staying in a stock that underperformed the indexes.
This provides a critical lesson to the average investor. Instead of assuming every Warren Buffett-related holding is a buy, investors should realize that a holding company may continue to own a stock for a variety of reasons.
Ultimately, the Berkshire Hathaway portfolio can be a starting point for finding investment ideas. However, instead of blindly following Buffett, investors should perform their own due diligence and allow the numbers to guide them.
Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
