Why Warren Buffett Invested in Coca Cola (NYSE: KO)

Why did Warren Buffett invest in Coca Cola (NYSE: KO)? Why Coca Cola has for many years been the most heavily weighted Warren Buffett stock in his portfolio.

Between 1988 and 1989, Buffett bought 7% of Coca-Cola (23.4 million shares) at an average price of $44 a share. Its price to book value then was 5x and price to earnings 13x – such a valuation seemed fairly rich already, but Buffett believed the company was still undervalued for the following reasons:

First, Coke’s price did not reflect the potential growth in its international sales, which Buffett saw as almost guaranteed.

Second, he reasoned that shareholder value could be unlocked further by more aggressive capital use. Indeed, KO soon announced a buyback of 6% of it shares, and increased its dividend payout by 18%.

Third, Coke made several mis-steps in the 1970s, but made important shifts in the right direction in the early 1980s under its new CEO Roberto Goizueta. The CEO gave the company new focus, and helped the company gain momentum in its international strategy, leading to a significant increase in overseas sales. Buffett saw in Goizueta very strong managerial talent in his mix of marketing and financial skills. An excellent jockey is one of the Key Factors Buffett considers when analyzing investments.

Fourth, obvious to most investors, Coke has a ubiquitous product with an impeccable brand name. This contributes to its strong moat – it is hard for any conceivable competitor to make a dent in Coca Cola’s brand. Buffett speaks fondly of this investment and often cites a quote from a 1938 Fortune story: “It would be hard to name any company comparable in size to Coca-Cola and selling, as Coca-Cola does, an unchanged product that can point to a ten-year record anything like Coca-Cola’s.” He further notes in his letter to shareholders, “In the 55 years that have since passed, Coke’s product line has broadened somewhat, but it’s remarkable how well that description still fits.”

One Comment

  1. In efffect, the Coke business model is unchanged for the past 50 years. The tactics may have changed, but the generic model stays the same.

    Technology companies must look at Coke with envy!

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