When Berkshire Hathaway (BRK.A -1.14%) (BRK.B -1.07%) CEO Warren Buffett buys or sells stock, new and tenured investors wisely pay close attention. That’s because the Oracle of Omaha, as he’s come to be known, has run circles around Wall Street for nearly six decades. Since becoming CEO in 1965, he’s delivered an aggregate return on the company’s Class A shares (BRK.A) of 3,813,861%, through the closing bell on Feb. 2, 2023.
Warren Buffett’s secret to success isn’t fancy software or charting tools. Rather, it’s buying high-quality, brand-name, cyclical businesses, and allowing his investment thesis to play out over many years, if not decades. It just so happens that many of these time-tested businesses also pay a dividend.
If there’s an unsung hero to Berkshire Hathaway’s investment portfolio, it’s the company’s dividend income. In 2023, Buffett’s company is on pace to collect more than $6 billion in dividend income, with a half-dozen holdings accounting for more than $4.8 billion of that total. It’s these income juggernauts that have played a monumental role in stabilizing Berkshire Hathaway during economic downturns and helping it significantly outperform over multiple decades.
One Buffett stock is more than doubling his initial investment every two years
But one of these dividend stocks is truly in a class of its own, and is responsible for more than doubling the Oracle of Omaha’s initial investment every two years.
Out of the roughly four dozen securities held by Berkshire Hathaway sits Warren Buffett’s longest-held investment — beverage stock Coca-Cola (KO -0.75%). Coke has been a continuous holding for Buffett’s company since 1988. The 400 million shares held at a cost basis of $1.299 billion equates to a per-share cost basis of just $3.2475.
One area where Coca-Cola has absolutely shone bright is in the dividend department. Last February, the company’s board of directors approved its 60th consecutive annual dividend increase. You can just about count on two hands the number of publicly traded companies with a longer existing streak of continuous base annual dividend hikes than Coke. Since the beginning of 2010, Coca-Cola has returned a cumulative $76.8 billion to its shareholders with its dividend.
At the moment, Coca-Cola’s base annual payout sits at $1.76/share. I say “at the moment,” because the company is just over a week away from its fourth-quarter earnings release. The company’s fourth-quarter release/annual roundup is when it announces an increase to its base annual payout.
With Berkshire Hathaway receiving $1.76 for each of its 400 million shares owned, it’s pocketing a cool $704 million in annual dividend income. More importantly, the $1.76/share payout relative to Berkshire’s $3.2475/share cost basis works out to a 54.2% yield. Based solely on dividend income, Coca-Cola is helping to more than double Warren Buffett’s initial investment every two years.
Here’s why Coca-Cola has been such a rock-solid investment for the Oracle of Omaha
If you wondering what’s made Coca-Cola such a fantastic investment for Warren Buffett and his investing team over the past 35 years, you’re not going to settle on a single point. Rather, it’s been a confluence of macro and company-specific factors.
For example, the vast majority of the beverage products Coke sells can be viewed as nondiscretionary. In simpler terms, no matter how well or poorly the domestic or global economy are performing, consumers are unlikely to change their consumption habits. Since everyone needs to eat and drink, demand for Coca-Cola products tends to remain consistent and predictable year in and year out.
On a more company-specific basis, Coca-Cola’s geographic diversity, marketing, and margin levers are helping to steadily move its profit needle higher.
With the exception of North Korea, Cuba, and Russia (due to its invasion of Ukraine), Coca-Cola has ongoing operations in every other country around the world. This allows it to take advantage of higher organic growth rates in developing and emerging markets, where it currently holds 6% of all commercial beverage volume. It can also generate highly predictable operating cash flow in developed markets, where it accounts for 14% of all commercial beverage volume.
In terms of marketing, Coke is nothing short of a superstar. Aside from being, arguably, the most-recognized consumer staples brand in the world, the company’s marketing department is able to easily connect with multiple age groups. Whereas younger consumers are lured by Coca-Cola’s social media campaigns and easily identifiable brand ambassadors, more mature audiences are liable to connect the Coca-Cola brand with its ties to the holidays (more specifically, by using Santa Claus in advertisements). Very few companies have the ability to engage and connect with consumers quite like Coca-Cola.
Lastly, there’s Coca-Cola’s ability to use its scale and marketing prowess to its advantage. Refining its supply chains, which includes sourcing products locally, reducing its selling, general, and administrative (SG&A) expenses as a percentage of total sales (without doing less with the capital it’s apportioned for SG&A), and leaning on dynamic pricing and promotion models, can help the company drive sales while delivering higher operating margin.
Even though Coca-Cola’s growth heyday is a distant memory, this beverage giant continues to deliver in a big way for Warren Buffett and Berkshire Hathaway’s long-term shareholders.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long January 2024 $47.50 calls on Coca-Cola, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.