The Safety of Investing in Coca-Cola
Total returns of 10% to 12% a year should appeal to investors looking to compound their wealth over time. Coca-Cola shares have even greater appeal due to their low-risk nature. Coca-Cola is a Dividend King; the company has paid increasing dividends for over 50 consecutive years.
Coca-Cola sells branded beverages. This reduces the risk of investing in the company. It is virtually impossible to imagine a world where humans no longer drink beverages. This means there will always be demand for Coca-Cola’s products. This is in stark contrast to riskier technology companies. Eastman-Kodak was a member of the “nifty fifty” at one time and believed to be a high quality business suitable for long-term investment. Unfortunately, the company’s competitive advantage was built in an industry that became obsolete. Eastman-Kodak filed for bankruptcy in 2012. It is very difficult to imagine a similar fate for Coca-Cola.
Warren Buffett first invested in Coca-Cola in 1988. Since around the time of Warren Buffett’s investment, Coca-Cola has total returns of around 2,500%since that time. Not bad for a business that just sells beverages. Coca-Cola is still one of Warren Buffett’s largest holdings.
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Valuation
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
– Warren Buffett
Coca-Cola is currently trading for a price-to-earnings ratio of 19.7 (using adjusted earnings). The company’s price-to-earnings ratio is slightly lower than the S&P 500’s current price-to-earnings ratio of 20.8. Coca-Cola is certainly not a deep value stock. The company is an exceptionally high quality business with a long growth runway ahead. Coca-Cola is likely trading around fair value at this time.
Final Thoughts
Coca-Cola has compounded shareholder wealth for very long periods of time. There is nothing standing in the way of future growth for Coca-Cola. The company will very likely continue rewarding shareholders with rising dividends and earnings-per-share as a result of Coca-Cola’s strong brand portfolio.
The Coca-Cola Co (NYSE:KO) has slowly transitioned from a business built on the Coca-Cola soda brand to a diversified global beverage powerhouse. Coca-Cola’s competitive advantage comes from its large advertising expenditures and its excellent distribution system. The company can either acquire or create new promising brands and quickly bring them onto the global scale. Coca-Cola is the global leader in juice, ready-to-drink coffee, and carbonated beverages. Coca-Cola makes an excellent investment for long-term investors looking for rising dividend income.
Disclosure: None
