Buffett began purchasing Coca-Cola (Ticker: KO) shares in 1988. Today, Buffett has over $13 billion in gains from his investments in Coca-Cola alone.
With hindsight, it is always easy to say Buffett’s investment in Coca-Cola was anything short of genius, but at the time Coca-Cola was facing concerns over maintaining market share and its ability to grow.
However, Buffett recognized that Coca-Cola had a strong brand name, very consistent history of earnings, shareholder return and low debt. It has been a wild 26 year ride for Buffett, but the returns have been staggering!
At the time of Buffett’s initial purchase of Coca-Cola shares, its market cap was about $18.5 billion. Coca-Cola then had Revenues of $8.3 billion, a cash pile of $1.2 billion, a net income of about $1 billion and about $4.4 billion in retained earnings.
Buffett purchased about $1.3 billion in Coca-Cola initially, or about 7% of the company. Today his total Coca-Cola stake is worth over $15 billion, and pays him about $490 million in dividends each year! Incredible returns off of a $1.3 billion initial investment!
But its always easy to quickly glance over the last 26 years. The truth is that it took some major cahones to hold anything over the last 26 years.
Would you have been able to overlook the short term negative outlook for Coca-Cola in 1988?
Would you have had the confidence to hold through a 50%+ drop from its 1998 highs to 2004 lows? Or weather the 2008 decline?
Here are some of the numbers from their late 70’s and 80’s annual reports:
Notice the dates on these charts, the 10 years PRIOR to Buffett’s purchase, nothing after. This is exactly the data Buffett would have had been looking at.
Coca-Cola had an incredibly consistent history of producing a profit. This is just one reason Buffett was comfortable committing a billion dollars to his investment in Coca-Cola.
I find it interesting that at Buffett’s time of purchase, Coca-Cola was up 400% over the previous 7 years. Looking at many charts today, I notice similar returns from the 2009 lows, and it makes me hesitant to invest. But this just goes to show the power of investing in a strong company, with an amazing competitive advantage over the long haul.
This is truly an incredible streak by Coca-Cola. Consistent Return on Equity of 20% or more!
At the time of Buffett’s purchase, Coca-Cola was trading relatively cheap with a PE ratio around 16. (Today as i write this Coca-Cola trades at a P/E of about 22.5)
Despite the rise, Coca-Cola held very little long term debt. In the company’s 1988 annual report, Coca-Cola reported a total debt of $2.1 billion
Back to the Present
I love these looks back into history, when we can try and get into the mind of Buffett and see what he saw. Then we can fast forward and see the ups and downs of the past 26 years in only a few seconds.
But imagine everything Buffett heard on the radio about troubles in the economy in the 80’s, 90’s, 2000’s and the first few years of this decade. Wars, terrorist attacks, tech bubbles, multiple banking crises, etc. With all of today’s media hoopla, investors have a hard time holding a stock for months, let alone decades. Let this be just one more lesson on the power of long term intelligent investing.