Coca Cola - a once in a lifetime opportunityWarren Buffett first encountered Coca Cola in 1936. As a 6 years old then, he bought Cokes at bulk price (6 for 25cents) and resold around the neighborhood for 5 cents each. He joked that he was well aware of the consumer attractiveness and the commercial possibilities of the product, but it wasn't 52 years later, in 1989, that he bought his stake in Coca Cola. Fast forward to 24 years later, Warren Buffett owns 400 million shares of Coca-Cola at a cost of 1.299 billion. Meanwhile the stock has paid a average dividend of 3%, repurchased its stocks and had 4 stock splits (1990,1992,1996 and 2012).
What triggered Warren Buffett to buy CokeNotably, Coca-Cola had a new CEO in 1981 (Roberto Goizueta) and under his leadership overseas sales exploded. According to other articles, in 1988, at the point of Warren Buffett's purchase, overall sentiment was not positive; Coca-Cola had reported earnings down 2 percent from previous year. Many analysts were of the view that other beverage companies would take away its market share. Plus the stock was trading at 14-19x P/E.
However, Warren Buffet saw Coca-Cola differently. "Buy commodity, sell brands" has long been a formula for business success. Coca-Cola had mind share, particularly its association with heroics, the Olympics and Music. Furthermore, Coca-cola is always building infrastructure in some country. Overall its moat keeps widening. Warren Buffett's assessment that Coca-Cola will transform from a country champion to a World champion was right on the dot.
Why Warren Buffett continue to hold his stake in CokeIn 1988 Warren Buffet acquired 46.7 million shares of coke at cost of $1,023,920,000 or at $21.93 per share. In 1989, his stake would have already doubled. Over the next 24 years, coke gave compounded return of 9-11%. But because Coke is a dividend stock and there is also stock repurchase and stock splits, Warren Buffett's yield to cost is extremely high.
His overall cost in coke stake is only $3.27 per share ($1.299 bn / 400 mn shares). The 2012 dividend was $1.3 per share (~3% at current price). Hence the yield to cost is a staggering 40%!!! ($1.3 / $3.27). In other words, he gets back 40% of his capital on dividend alone! Another perspective is to view Coke stock as a bond that pays coupon of 40% and may even increase further.
What triggered Warren Buffett to buy CokeNotably, Coca-Cola had a new CEO in 1981 (Roberto Goizueta) and under his leadership overseas sales exploded. According to other articles, in 1988, at the point of Warren Buffett's purchase, overall sentiment was not positive; Coca-Cola had reported earnings down 2 percent from previous year. Many analysts were of the view that other beverage companies would take away its market share. Plus the stock was trading at 14-19x P/E.
However, Warren Buffet saw Coca-Cola differently. "Buy commodity, sell brands" has long been a formula for business success. Coca-Cola had mind share, particularly its association with heroics, the Olympics and Music. Furthermore, Coca-cola is always building infrastructure in some country. Overall its moat keeps widening. Warren Buffett's assessment that Coca-Cola will transform from a country champion to a World champion was right on the dot.
Why Warren Buffett continue to hold his stake in CokeIn 1988 Warren Buffet acquired 46.7 million shares of coke at cost of $1,023,920,000 or at $21.93 per share. In 1989, his stake would have already doubled. Over the next 24 years, coke gave compounded return of 9-11%. But because Coke is a dividend stock and there is also stock repurchase and stock splits, Warren Buffett's yield to cost is extremely high.
His overall cost in coke stake is only $3.27 per share ($1.299 bn / 400 mn shares). The 2012 dividend was $1.3 per share (~3% at current price). Hence the yield to cost is a staggering 40%!!! ($1.3 / $3.27). In other words, he gets back 40% of his capital on dividend alone! Another perspective is to view Coke stock as a bond that pays coupon of 40% and may even increase further.
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