Buffett's Berkshire: The Ultimate Buy & Hold Bonanza
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It just seems counterintuitive that the greatest investor of all time, Warren Buffett, could make the bulk of his fortune with just a few decisions to purchase companies without a real exit strategy. It just sounds too simple.
We've seen Buffett's defense of inactivity in trading stocks and it sounds almost trite:
"The idle rich get a bad rap: it’s actually a heck of an investment strategy".
Another Buffettism: "You don't get paid for activity, just for being right".
I suggest for Buffett and his investment vehicle, Berkshire Hathaway; The Coca-Cola Company (NYSE: KO) is the definition of "being right." And Coke is making the idle rich---even wealthier.
Buffett concurs with Peter Lynch's term "diworsification" when it comes to diversifying a portfolio: you create alpha when you KNOW you're right and have the conviction to invest heavily in 1--or just a few ideas.
In 1988, Berkshire Hathaway (NYSE: BRK-B) had $550 million in pretax operating earnings. That year Berkshire Hathaway began to purchase more than twice that amount, $1.3 billion, in 1 stock: the Coca-Cola Company. I recall analysts saying Buffett had lost it as an investor, that Berkshire Hathaway was simply a non-dividend paying proxy for Coca-Cola, and that Berkshire was doomed to mediocre future prospects. Clearly its growth years were in the rear view mirror.
In 1988, Berkshire stock sold for $6,000/share. Today it’s over $150,000.
So Coke's decision to raise its dividend 10% this week was probably greeted by a smile in Omaha, if not a yawn.
Coca Cola Dividends:
**Coke has paid dividends for 93 consecutive years
**Coke has raised its dividend 51 consecutive years
**Berkshire earns a 34% yield on its original Coca-Cola investment
That’s because Coke has paid a dividend each year since 1920, and raised the dividend each of the past 51 years.
Buffett today earns an annual dividend yield of 34% on his original Coke investment: $448 million per year.
About every 2 1/2 years Coke returns Buffett's original investment back to him in cash. Again, and again, and again…
It’s Never Easy Buying Coke Because It's Rarely Cheap
It took courage for Buffett to bet the ranch on a single stock. Especially for a value investor "paying up" at no discount to the general market. It’s never easy buying Coke. There are still many reasons not to invest in it today: It sells for a hefty 19 times trailing earnings, 16 times cash flow, and 5 times book value. Coca-Cola's products are under full attack in developed markets--with momentum for "sugar taxes" on soft drinks, even limits on soda sizes proposed by New York City Mayor Bloomberg. The truth is Coke is never cheap, nor easy, for a value investor to buy. But Coke represents Buffett's original adoption of partner Charlie Munger's advice: sometimes you need to "pay up" for truly extraordinary businesses. I believe the Coke investment represented a significant philosophical evolution for Buffett: from an absolute value/cigar butt investor to a value investor who assigned significant worth to off balance sheet assets, most notably the power of global franchises.
Coca-Cola Company is much more than just the flagship brand. Its portfolio has exploded during Berkshire's ownership to more than 500 beverages. Beverages made specifically for the tastes of consumers in virtually every country of the world. While Coke itself has relatively flat sales in North America, sales of PowerAde and Minute Maid are booming--up nearly 10%.
Coke Continually Shrinks Share Count, While Growing Business
Berkshire's do nothing approach to managing its mega Coke holding the past quarter century will likely prove to be a brilliant strategy the next quarter century, too. One reason: Coke increases Berkshire's share of ownership every year: Coca-Cola is committed to buying back up to $3 Billion of its stock each year thanks to its large cash position, strong free cash flow, and pristine balance sheet. In recent years it’s fueled growth by buying up bottling operations around the globe, including Coca-Cola Enterprises.
Back in the late '80s, Warren Buffett identified Coca-Cola as an emerging global giant with a product and global distribution system in place that assured generations of strong growth. Boy was he right! What was a North America centric company then is now only 43% developed nation sales, 37% developing nation sales, and 20% emerging markets. Africa, Eurasia, and Latin America sales are growing rapidly. Want a safe emerging markets play headquartered in the US? Coke estimates by early next decade it will be exactly diversified 33%/33%/33% among those 3 global sectors.
And the sparkling 10% Dividend Increase this week is only its historic average increase. There are simply no other companies that perform so consistently over not just years...but generations.
That’s why Buffett owns 400 Million Shares and hasn't sold a single share. He called it a permanent holding 25 years ago. And he meant it.
The lesson: buy truly great businesses at fair prices and get out of the way. They're irreplaceable.
Grahdodd owns positions in BRK-A and BRK-B. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!