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Warren Buffett is considered one of the greatest investors in history.
Therefore, his investment decisions carry a lot of weight.
His company, Berkshire Hathaway, owns 400m shares of Coca-Cola (NYSE:KO), representing a stake worth $24bn. It’s also Berkshire Hathaway’s longest, continuous holding right now, with its shares first being acquired by the company 35 years ago.
Since the pandemic hit, Coca-Cola shares have barely moved, almost sitting in the same position.
However, I believe that it’s still a great company to invest in.
Powerful brand
2023 was a tough year for most consumer brands globally. With inflation causing cost constraints for most people, it’s been tough to grow revenue.
However, Coca-Cola has managed to do just that.
It grew revenue 6% year on year to $45.8bn. It’s worth pointing out that the majority of this revenue growth came from price increases, as the total volume of beverages sold only increased by 2%.
This isn’t a bad thing. It shows that Coca-Cola still has a lot of pricing power, especially in a time of high inflation. Its sticky and powerful brand is why consumers continue to buy.
Furthermore, it’s also managed to keep its costs in check. The cost of goods sold only increased by 3%, which has contributed to overall net income rising by 12% to hit $10.7bn.
Forward guidance for 2024 also impresses me. The company expects revenue to increase again by 6%-7% and earnings per share (EPS) to rise by 8%-10%.
This is great as it’s already the largest beverage company in the world, yet is still generating meaningful growth.
The dividend: a benefit and a problem
Coca-Cola is a dividend king, which means that it’s raised its dividend for at least 50 years straight. In this case, it recently announced its 62nd consecutive year of dividend growth.
This is great for investors, with its 3.3% dividend yield a great source to make some passive income.
Just ask Warren Buffett. He last invested in its shares in 1994, bringing his total investment to $1.3bn. Through compounding, Berkshire Hathaway is set to earn $776m in dividends this year from that investment.
However, the 5% dividend increase is lower than the 2% increase in free cash flow for 2023. For perspective, free cash flow was $9.7bn in 2023, with dividend payouts and share repurchases the same amount. This leaves the company with very little to reinvest back into the business.
If this trend continues where dividend growth outpaces free cash flow, then it could be faced with a problem.
Having said that, I don’t believe that this will happen anytime soon, it’s just a point for me to consider over the longer term.
Moreover, with almost $9.4bn in cash, Coca-Cola has plenty of room to keep increasing its dividend for now.
Now what?
Coca-Cola has incredible brand power and consumers love its products. Therefore, I can continue seeing strong and steady growth moving forward.
It’s also highly profitable and is consistently improving its operating efficiency. That’s why I’m continuing to buy more of its shares.
