Some investors prefer to own businesses registering tremendous revenue or user growth. The hope is that this can lead to huge returns. But not all market participants adopt this philosophy.
Some simply want to own stable and profitable enterprises that pay healthy dividends to shareholders. In fact, this is something Warren Buffett appreciates, as one of Berkshire Hathaway‘s top holdings demonstrates.
There’s one dividend stock in the portfolio that generates nearly $800 million in yearly income for the Oracle of Omaha’s conglomerate. Should you buy it?
Thirsty for dividends
Berkshire owns dozens of stocks, but its fourth largest holding is Coca-Cola (KO 0.74%). The global beverage giant makes up 8.4% of the portfolio, with Berkshire owning 400 million shares. Based on Coca-Cola’s quarterly dividend payout of $0.48, this equates to $768 million in annual income for Buffett’s company.
That’s an unbelievable income stream Berkshire receives for doing absolutely nothing. It can use this consistent windfall to direct capital to other parts of the conglomerate that might be able to earn a higher return.
Coca-Cola’s dividend yield at the moment is 3.1%, which is solid. But what’s even more impressive is the fact that the quarterly payout has increased for 62 straight years, an impressive track record highlighting management’s commitment to investors. This year potentially could be the 63rd.
Standing the test of time
Besides Coca-Cola’s notable dividend history, there are other favorable qualities that can’t go unnoticed. This is undoubtedly a fantastic company, which is definitely why it has such a high weighting in the Berkshire portfolio.
The key aspect of Coca-Cola’s success over such a long period of time (it was founded in 1886) is the brand. This is a consumer favorite, with more than 200 different drink concepts that are offered in more than 200 countries and territories. Coca-Cola products are virtually everywhere, with 2.2 billion servings consumed per day.
The ability to be consistent over decades helps consumers build trust in and loyalty for the product. That also leads to pricing power. Even though unit volumes declined last quarter, the business benefited from favorable pricing trends.
Investors seem increasingly worried these days about macroeconomic issues. More specifically, their attention is directed to figuring out where interest rates are headed or what GDP growth will look like.
For Coca-Cola shareholders, this hardly matters. Demand is durable no matter what’s going on with the state of the economy, as consumers are inclined to make these small, repeat purchases to get their favorite beverage. This makes the company somewhat resilient to recessionary pressures.
Coca-Cola wouldn’t be able to pay an increasing dividend for such a long time if it wasn’t extremely profitable. Through the first three quarters of 2024, the company was able to generate $7.6 billion of free cash flow from $35.5 billion on net operating revenue. That’s a stellar margin.
Do you want to beat the market?
It’s understandable if you immediately want to follow behind Buffett and buy Coca-Cola stock. But if your ultimate goal is to buy businesses that can outperform the stock market, then the beverage giant should be avoided.
In the past decade, Coca-Cola has produced a total return of just 101%. The S&P 500, on the other hand, would’ve more than tripled your money. While the company has notable positive attributes, its growth prospects are very limited due to the very mature nature of the industry. Add that to a fully valued price-to-earnings (P/E) ratio of 25.8, and it’s easy to see why this isn’t a market-beating stock.
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.
