Berkshire Hathaway’s ownership of 400 million shares of the Coca-Cola Company (9.3%) is impressive, but what’s even more impressive is Berkshire’s annual return on its investment.
In 2014, Berkshire received $518 million in annual dividends on its Coca-Cola holdings, which brought its annual return, excluding unrealized gain, to over 40%.
Speaking of unrealized gain, the cost basis of the shares he purchased in 1988 and 1989 was $1.29 billion, a stake that is now worth a whopping $16.39 billion.
What was Warren Buffett’s Secret?
The key was buying Coca-Cola at the right price. An important lesson for any investor.
Buffett, who admired Coca-Cola all the way back to his boyhood days in Omaha, waited until 1988 to start amassing shares. At the time, the company was out of favor with Wall Street, but Buffett believed in the durability of the brand.
“I like wonderful brands,” Buffett explained at the 2013 Coca-Cola annual shareholders meeting. “If you take care of a great brand, it’s forever.”
At the same meeting he also gave insight into his investment philosophy.
“I’m the kind of guy who likes to bet on sure things,” Buffett said. “No business has ever failed with happy customers… and you’re selling happiness.”
Buffett, who drinks five Cokes a day, and recently proclaimed that he is “one quarter Coca-Cola,” is still high on the company. In fact, he played his ukulele and sang a version of Coke’s famous jingle I’d like to teach the world to sing in the film shown at the 2015 Berkshire Hathaway annual meeting.
Setting Your Sights on Forever
Not all stocks can be held forever. It certainly wouldn’t have been a good decision with RadioShack, but that’s where evaluating the quality of the company comes into play.
In Buffett‘s 1988 letter to shareholders, he forecast his long term goal for Berkshire’s new Coca-Cola stake, noting that “when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
That “forever” holding period in the case of Coca-Cola continues to pay huge dividends to Buffett and all of Berkshire’s shareholders.
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.