On the Equity Mates podcast recently, Bill Ackman shared a story of the time he had dinner with Warren Buffett. Ackman said he offered Buffett water, but he turned it down for a Cherry Coke. Buffett said, "Bill, I haven't had water in 48 years." The dinner was years ago, but the story only went viral when Ackman mentioned it on the podcast. And we know this wasn't some newfound love Buffett had for Coke. His company, Berkshire Hathaway (BRK.A), built its stake in Coca-Cola (KO) between 1988 and 1994 for about $1.3 billion. Coca-Cola has split its stock since then, so that stake is now 400 million shares.
Coca-Cola pays $0.53 a share in dividends each quarter, or $2.12 a year. This means Berkshire gets paid roughly $848 million a year for its investment. That's about 65% of what Berkshire originally paid, coming back in a single year. And since Coca-Cola raises its dividend every year, that number keeps growing. Back in 1994, the same shares paid Berkshire about $75 million a year, not even one-tenth of what it earns today. At around $96 a share, the stake is now worth approximately $38.4 billion. Berkshire still holds the entire stake, and its CEO, Greg Abel, called Coca-Cola one of four core holdings.
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Why Cramer Likes Coke Now
On October 27, Coca-Cola reported its earnings and beat both revenue and EPS expectations. Revenue came in at $13.4 billion versus the $12.92 billion expected, and adjusted EPS came in at $0.91, above the $0.88 consensus. The company raised its full-year outlook for the third straight quarter. Jim Cramer recently said he would buy Coca-Cola. The stock has outpaced every Magnificent 7 name this year, according to TheStreet. I think one of the reasons the stock is doing so well recently is that, in a month when tech stocks have fallen hard, investors have turned to a steady company with a growing dividend.
One weak spot is the company's North American unit case volume, which was flat year-over-year. Management partly blamed holiday timing but also admitted that rising costs are squeezing many American consumers. PepsiCo (PEP), its biggest rival, also saw North American volume fall 2% in its latest quarter. So the pressure seems to be hitting the whole industry.
About Coca-Cola Stock
Coca-Cola is the world's biggest soft drink company, selling brands like Coca-Cola, Sprite, Fanta, and Powerade in more than 200 countries. It's also one of Warren Buffett's all-time favorite investments, and Berkshire has held its stake for more than three decades. Founded in 1892, the company is based in Atlanta, Georgia, and led by CEO Henrique Braun.
Coca-Cola's stock is up about 39% so far this year, outperforming the Consumer Staples Select Sector SPDR Fund's (XLP) 17% gain over the same period. The stock now sits very close to its all-time high of $96.26. The stock has climbed about 6% in the past week alone, thanks to a strong third-quarter report and management raising its full-year guidance again.
www.barchart.comAfter its recent rally, Coca-Cola's stock doesn't look cheap anymore. Its forward P/E of 28.17x sits about 18% above its five-year average of 23.86x. Similarly, its forward price-to-sales ratio of 8.02x is about 28% above its 6.29x average. That's a steep premium for a company whose earnings growth is expected to be slow for the next few years. After an 11% jump this year, analysts expect earnings to grow just 5% to 7% a year through the end of the decade. Looking at the balance sheet, Coca-Cola holds $16.60 billion in cash against $42.48 billion in debt. The resulting net debt of $26 billion seems manageable for a company worth over $400 billion. At $96 a share, though, new buyers only get about a 2.2% dividend yield. That's far less than the 65% return Berkshire gets, and it shows how successful the $1.3 billion investment that was made decades ago has been.
What Do Analysts Expect for Coca-Cola Stock?
Based on 25 Wall Street analysts, Coca-Cola holds a “Strong Buy” rating with a mean price target of $98.04. Since the stock’s big run, that mean target now indicates a modest 2% upside.
www.barchart.com On the date of publication, Jabran Kundi did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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