Long time readers already know that I am a fan of Warren Buffet. His value investing strategy has led to massive gains over the years. So when I have a little free cash, one place I always look is at the stocks Warren has bought for Berkshire Hathaway. This week, I purchased The Coca Cola Company. Here’s a brief analysis to explain why I did it.
About the Company
The Coca Cola Company (NYSE:KO) own one of the most recognized brands in the world. The nearly 100 year old beverage company produces an array of non-alcoholic beverage. In addition to its namesake Coca Cola, Coke owns Sprite, Fanta, Powerade, Minute Maid, FUZE, Dasani, glacéau, and a handful of other successful beverage brands.
Coke produces beverages through a combination of self-owned facilities and exclusive licensing arrangements.
The company’s stock is 62% owned by institutional investors. The top investor is Berkshire Hathaway with a 19% stake. The next largest shareholder, Vanguard, holds less than 1% of the company.
The Coca Cola Company has a clean balance sheet with about $88.5 billion in assets and $56 billion in liabilities. It has no solvency concerns and has a good rating from the debt rating agencies.
In 2012, the company generated $48 billion in revenue with an operating income of nearly $11 billion. The most recent earnings per share was $1.91 and the company’s P/E was 20.83, in line with industry peer PepsiCo.
Over the last four years, revenue has increased steadily and the company has generated a steady cash flow to buy back company stock, pay a dividend, and pay down outstanding debt.
Check out this post for more on fundamental analysis and technical analysis.
Coke has paid a dividend since 1987. It has steadily increased that dividend, recently to $0.28 per quarter, or $1.12 per year. At the current stock price, that is 2.82% per year.
I firmly believe in reinvesting dividends until retirement. Sometimes high dividend stocks are great, but it is always important to assess the ability of the company to continue to pay the dividend and meet its obligations.
Comparing the Yield to My Mortgage
I don’t have any worries about Coke’s revenue declining or a dramatic change in business practices. The dividend yield is steadily increasing, and I noticed something interesting right before I purchased the stock.
My mortgage interest rate is 2.875%. I recently debated paying off my mortgage early or investing my extra money, and I decided I could likely come out ahead by investing before paying off my debt.
When I bought Coke, the dividend yield was nearly 3%. That is higher than my mortgage interest rate. Putting taxes aside, it is clearly better to invest in Coke than pay my mortgage early, as the same $1 will make me more invested than it will save me by paying early.
I’m proud to have The Coca Cola Company join my portfolio as my newest investment. If you have any questions or comments, please let me know in the comments.
Oh yeah, and Coke is way better than Pepsi.
Image by Joelk75 / flickr