Alert: 1 Warren Buffett Stock To Buy Before Takeoff
Investment Alert: Buy Coca Cola (KO) Under $59/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
A glance at Berkshire’s portfolio will reveal Coca-Cola as one of its heavyweight investments, a position fortified by decades of escalating capital gains.
Yet, what tickles Buffett’s fancy even more than the stock’s appreciation is the consistent dividends flowing from Coca-Cola into Berkshire’s coffers. It won’t be long before annual KO dividends paid to Berkshire Hathaway hit $1 billion, providing the Oracle of Omaha’s firm with the cash flow needed to invest in other, even higher yielding opportunities.
The market’s short-term outlook on the beverage giant has led to an attractive entry price; analysts see upside to about $70 per share, a near 20% return from current levels in the $50s.
But why is Coke a buy now?
Coca-Cola Is Crushing Its Numbers
Coca-Cola’s financials are truly a thing of beauty. With a gross profit margin of 59%, and $3.7 billion in operating income last quarter, Coca Cola continues to crush its numbers and gain market share.
With its healthy P&L and rock solid balance sheet that includes $12.5 billion in cash and $3.1 billion in short-term investments, Coca Cola pays a handsome 3.1% dividend yield too. Furthering the argument that is dividend is rock solid is a six decade history of paying out loyal shareholders.
The Stock’s Rough Ride in 2023
Despite its financial successes, Coca-Cola’s stock has had a terrible 2023, down 7% for the year relative to the market which is up double digit percentages.
We think this relative underperformance masks an opportunity for investors to buy in at lower prices before long-term gains accrue.
After all, Coca-Cola is finding innovative ways to grow through a wide variety of brands, and with its wide moat and pricing power has adeptly transferred rising costs to consumers. We don’t anticipate Coke’s margins will suffer much from inflationary pressures as other consumers goods likely will.
Berkshire Hearts Dividends
Berkshire Hathaway doesn’t just depend on Coca-Cola for its dividend income. From Chevron to Apple, it accumulates billions of dollars in dividends each year simply by holding onto shares of its favored equities.
The strategy has been a winner, and even been proven through research to stand the test of time. Famously, Prof. Siegel wrote in Stocks for the Long Run that most of the past century’s returns were earned through re-invested dividends compounding.
Berkshire also favors firms that engage in share buybacks. Heck, Buffett has been a big proponent of it for his own firm. And he scoops up companies that follow the same policy, such as Chevron which launched a massive $75 billion program.
The bottom line is Buffett sticks with companies that have a long and trusted history of paying out dividends that don’t compromise the balance sheet. Coca Cola is perhaps the prime example of that in his portfolio so if you’re looking for income and a rock solid company for the long-term, you could do a lot worse than joining Buffett on the Coca Cola horse.
