Experiencing a 12% decrease within a month, is Coca-Cola still the ideal choice for dividend investing, as suggested by Warren Buffett?
Experiencing a 12% decrease within a month, is Coca-Cola still the ideal choice for dividend investing, as suggested by Warren Buffett?
Berkshire Hathaway, headed by Warren Buffett, has been holding onto Berkshire Hathaway Class A (BRK.A 0.25%) and Berkshire Hathaway Class B (BRK.B 0.11%) stocks for decades. One of Buffett's most successful investments, The Coca-Cola Company (KO -0.24%), has seen its value soar and has consistently delivered passive income.
Despite being a reliable performer, Coca-Cola's stock has slipped more than 12% in the past month, effectively wiping out most of its year-to-date gains. Let's delve into why Coca-Cola is underperforming and if it's worth investing in as a dividend stock at the moment.
Durable investments
Coca-Cola and American Express (NYSE: AXP) are two of Berkshire's longest-standing investments. Together, they make up over 23% of Berkshire's publicly-traded portfolio. In his annual shareholder letters, Buffett has praised both companies for their ability to consistently repurchase shares and increase dividends.
Share buybacks allow shareholders to increase their ownership stake in a company without purchasing additional shares. For example, with 100 shares, each share represents 1% ownership. However, if a company utilizes excess earnings to buy back and retire 20 shares, there will now be only 80 shares, making the original shareholder's stake equal to 1.25%.
Furthermore, if a company raises its dividend each year, each share will generate more passive income, leading to a positive feedback loop that benefits long-term Coke and American Express shareholders.
Both companies are far from perfect. Buffett has acknowledged their past mistakes, including overexpansion and missteps by management that negatively impacted shareholders. Yet, Coca-Cola and American Express are such strong businesses that they are challenging to tarnish beyond temporary setbacks. As Buffett stated in Berkshire's 2023 letter, "Coke and American Express are examples of 'When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.'"
Coca-Cola: a passive income powerhouse
Coca-Cola remains one of the top options for generating reliable passive income. With 62 consecutive years of dividend increases, it qualifies as a Dividend King. It also boasts a solid yield of 3.1%, which is far superior to many other businesses with a history of raising dividends.
Coca-Cola's non-alcoholic beverage portfolio is diverse, spanning categories such as soda, tea, coffee, juice, sparkling water, water, sports drinks, and more. It also has a global reach. For the nine months ending September 27, 2024, North America accounted for 39.3% of consolidated revenue and 43.4% of consolidated operating income. While North America remains Coca-Cola's largest market, it no longer dominates sales or operating income outside North America.
Coca-Cola also boasts a robust supply chain and network of bottling partners that enable it to achieve impressive operating margins. By outsourcing certain production and distribution tasks, Coca-Cola can remain flexible, adjusting its beverage offerings in response to regional demands.
Nonetheless, Coca-Cola is not immune to risks. Its sales, measured by unit case volume, tumbled in the recent quarter. To drive earnings growth, Coca-Cola has relied on price increases and successful beverage brands. However, there are limits to how much prices can be increased, notably in the face of declining consumer demand.
Coca-Cola's global reach helps shield it from regional slowdowns, but its worldwide presence also exposes it to currency risks. Since a majority of Coca-Cola's revenue comes from outside the U.S., a strong U.S. dollar can force lower earnings due to currency conversions.
The ICE U.S. Dollar Index, which tracks the U.S. dollar's value versus a basket of foreign currencies, reached a 52-week low in late September but has since rebounded to a new 52-week high, potentially fueled by the impact of Trump administration policies.
In summary, Coca-Cola's downturn can be primarily attributed to an unimpressive earnings report and concerns over potential short-term earnings decline due to weakening demand and a strong U.S. dollar. However, despite its challenges, Coca-Cola remains a strong value and an excellent long-term investment opportunity. The graph below indicates that its price-to-earnings (P/E) ratio is now below several historical averages.
While the forward P/E ratio appears incredibly cheap, it should be interpreted with caution, given potential downward revisions to Coca-Cola's earnings due to the aforementioned concerns. Coca-Cola may still decline in the short term due to numerous factors working against it. However, investors may have a golden opportunity to purchase Coca-Cola at a discount and it remains an excellent long-term choice. It's also noteworthy that declining demand and a strong U.S. dollar would mostly impact Coca-Cola's earnings rather than materially affecting its overall performance. Coca-Cola's rock-solid balance sheet and top-tier financial position make it well-equipped to raise its dividend even during periods of reduced earnings.
Lastly, risk-averse investors may be better off investing directly in Berkshire Hathaway stock.
Besides its public equities investments, Berkshire also oversees several insurance ventures, BNSF railway, Berkshire Hathaway Energy, and a multitude of manufacturing, retail, and other businesses.
Berkshire saw significant stock selling activities in 2024. Notable decreases in Apple, Bank of America, and other holdings boosted Berkshire's cash and Treasury reserves, reaching an astonishing $325 billion — surpassing the value of its entire equity portfolio.
Buying shares of Berkshire Hathaway grants investors access to a cross-section of stable and somewhat monotonous businesses. By leveraging its cache of ample funds, Berkshire can capitalize on stock discounts in a market downturn or make shrewd acquisitions during opportune times.
Two stocks to consider investing in now
Retirees seeking additional income or a reliable stream of passive earnings might favor Coca-Cola over Berkshire Hathaway.
Regardless of preference, both Coke and Berkshire Hathaway stand out as reliable, safe investment options currently. Coke boasts an impressive history of increasing its dividend, boasts the financial stamina to maintain such raises even in the face of reduced earnings, and presents a compelling value proposition. Berkshire, for its part, boasts a diverse collection of safe businesses and a substantial liquidity cushion to weather hardships.
For investors seeking a balance, a 50/50 dividing line between these two blue-chip stocks could be an ideal move.
In the context of Berkshire Hathaway's portfolio, one could consider diversifying investments by allocating funds to both Coca-Cola and Berkshire Hathaway Class A or Class B stocks. This strategy could provide a stable source of income, as both companies have a history of increasing dividends.
Additionally, finance experts often recommend that investors consider utilizing dollar-cost averaging when investing in stocks, such as Coca-Cola or Berkshire Hathaway, to minimize risk and reduce the impact of market volatility on the overall investment.