People would be interested to know what the biggest holding of Berkshire Hathaway(NYSE: BRK-A) (NYSE: BRK-B) is. The answer is simple, it is the recession-proof stock that Warren Buffett would like to hold forever. The consistent and historical growth of this company has rewarded its shareholders, and Mr. Buffett. Buffett bought this stock in 1988 and has been holding it until now. It is Coca-Cola (NYSE: KO)
Coca-Cola is a very simple, and even boring business. It sells its own concentrates and syrups to bottling and canning partners. The formulas are the intellectual properties of the company. Coca-Cola has a long operating history dating back to 1886, and it has become the largest global beverage corporation with more than 500 beverage brands in more than 200 countries. Everybody drinks Coke, from the rich to the poor, from a farmer to a billionaire.
Warren Buffett first bought Coca-Cola’s stock in 1988, with a $1 billion purchase. At that time, Wall Street thought buying Coca-Cola was crazy. The price he paid for was not a screaming bargain in terms of valuations, with 14.5x P/E and 4.8x P/B. Now, he owns 400 million shares, accounting for more than 20% of his total portfolio. Warren Buffett commented that Coca-Cola would be one of his permanent positions. The best action is just to sit on Coca-Cola’s and do nothing. The company is considered to have the extremely wide moat, he said: “If you gave me $100 Billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world,' I’d give it back to you and say it can’t be done.”
Indeed, in 2011, Coca-Cola has a 41.9% market share globally, much more than its closest rival, PepsiCo's (NYSE: PEP), 29.9%. Previously, two companies competed directly in a so-called Cola war. PepsiMax was even designed in a TV commercial to show that it had a better taste than Coke Zero. However, when Ms. Indra Nooyi took over as PepsiCo’s chief, she redefined its strategy to focus more on higher margin and healthier beverages. Her ambitious goal was to grow PepsiCo’s revenue from those nutritional products to $30 billion by 2020. However, the refocus would move PepsiCo away from its core competitive advantage with carbonated soft drinks. In the last 5 years, Coca-Cola returned nearly 45% to shareholders, much higher than the total return of 13.2% that PepsiCo has delivered. In the carbonated soft drink industry, the third position belongs to Dr. Pepper Snapple (NYSE: DPS), with the operation in the US, Canada, Mexico, and Caribbean, whereas Coca-Cola and PepsiCo are busy expanding internationally. DPS is the oldest soda brand in the US, with a 16.9% market share of carbonated soft drinks. It is interesting to note that in the past 5 years, the total return that Dr. Pepper has delivered to its shareholders was more than 85%, two times higher than Coca-Cola. Dr. Pepper is paying a similar dividend yield to PepsiCo, 3.1%, whereas Coke's dividend yield is 2.7%. However, Dr. Pepper is still at a far behind its two main competitors in market share. Coca-Cola is still the dominant player in this industry, with the largest global market share. It is worth $166.53 billion, with 19.5x P/E, whereas PepsiCo is worth $106 billion, with 18.2x P/E and Dr. Pepper Snapple is worth only around $9 billion, with 14.9x P/E.
The more it has been growing and expanding globally, the more social proof it has created. As Charlie Munger pointed out, social proof was the psychological factor that provides huge advantages to scale. Coca-Cola has it, as it’s available nearly everywhere on this planet. In addition, for more than a century of operation, Coca-Cola has been very successful in associating its products to happiness. Whenever people think of Coke, they think of happiness. That is why it has an “untapped pricing power.” It means the price of Coke could increase several pennies, and still users would be still very happy to buy it.
On the last note, Coca-Cola is trading at 19.5x trailing P/E, and a lot of investors might think it’s pricy. However, Roberto Goizueta, Coca-Cola’s CEO in the 1980s often quoted a 1938 Fortune article: “Several times every year a weighty and serious investor looks long and with a profound respect at Coca-Cola's record but comes regretfully to the conclusion that he is looking too late.”