Warren Buffett’s holding company, Berkshire Hathaway, owns a mix of about 45 stocks at any given time. Although it’s diversified, it leans heavily toward bank stocks and value stocks, with only a smattering of growth stocks and tech stocks. And Buffett loves dividends.
Your individual goals will likely look different from Berkshire Hathaway’s, which has certain targets it has to confront and a strategy to grow its billions of funds for clients. Most individuals do well with a fully diversified portfolio by size, industry, and more.
One feature that stands out for most Buffett stocks, and which is also a factor individual investors should consider, is valuation. If a stock’s valuation is already too rich, the chance of soaring decreases. The premise behind finding undervalued stocks is that the price will rise to confront the real value of the stock.
Buffett’s longest-held stock, which he said he would never sell, looks pretty cheap right now. Here’s how Coca-Cola (KO 0.34%) stock could help make you rich.
Why does Buffett love Coca-Cola stock?
Buffett frequently mentions Coca-Cola in interviews, shareholder letters, and annual meetings. He loves Coca-Cola because he sees it as playing a role in the American story, helping to drive the economy. That gives it a future that inspires confidence.
Coca-Cola is the largest beverage company in the world, with $45 billion in trailing-12-month sales. The company struggled with severe setbacks during the pandemic when people stayed home, and it was forced to make critical changes. But it has emerged from the pandemic as a leaner, more efficient company, with a new structure and about 200 brands, or half of what it had before.
The company raised prices to combat the effects of inflation, and sales continue to rise, growing 8% over last year in this year’s third quarter. Earnings per share (EPS) increased 9% to $0.71, and even the core operating margin widened ever so slightly from 29.5% to 29.7%.
It wasn’t only the price hikes. Volume increased by 2% over last year, and that speaks to the power of Coca-Cola’s brand and why its long-term story is so compelling.
It’s all about the dividend
Berkshire Hathaway completed its purchase of Coca-Cola stock for a total of $1.3 billion in 1994, and it hasn’t sold a share since. In 1994, the total dividend from Coca-Cola stock was $74 million, and it expanded to $704 million in 2022. That’s the kind of passive income stream which is very attractive, particularly for retirees, but for any investor. It adds enormous value to the stock on top of price appreciation.
Coca-Cola is a Dividend King and has been raising its payout annually for the past 61 years. At the current price, it yields 3.1%. Management has demonstrated its complete commitment to the dividend even under adverse conditions, and it’s one of the most reliable dividends on the stock market.
Coca-Cola stock is close to a three-year low
Investors became more enthusiastic last year about Coca-Cola stock when they moved into safe stocks, and it gained 7.5% in 2022 even as the S&P 500 lost 19.5%. As investors adopt growth stocks again, that trend has reversed. Coca-Cola stock is down 8% this year as the S&P 500 is up almost 19%.
At the current price, Coca-Cola shares trade at a price-to-earnings ratio of 23. This is close to its cheapest valuation in three years.
KO PE Ratio data by YCharts.
It’s actually close to the lowest it’s been in 10 years outside of the 2020 crash. Investors are moving their money back into growth stocks, and that spells opportunity for investors looking for a bargain.
To see how it could work practically, Coca-Cola increased EPS by 40% over the past three years. During that time, the average price-to-earnings ratio was 27. Using the same EPS boost would direct to a stock price of $94 in three years, or a 61% boost over today’s price. And that doesn’t include the dividend.
Over a longer time period, expect to see much higher gains. Coca-Cola stock could be part of a varied portfolio that could help make you rich over time, and it’s priced to buy.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
