One of the most successful stock market investors of the past century is billionaire Warren Buffett. He has a portfolio concentrated on a few blue-chip companies. One of his long-term holdings is Coca-Cola (NYSE: KO) shares.
As a believer in the financial benefits of long-term investing myself, the fact that Buffett has held onto his Coca-Cola shares for decades grabs my attention. Indeed, he purchased the stake between 1987 and 1994. He has bought none of the shares for three decades.
So, should I consider adding Coca-Cola shares to my portfolio?
Every investor is unique
The first thing to note is that what works for Warren Buffett might not work for others.
Every investor is different. Simply aping the investment strategy of someone else does not seem wise to me – I need to find my own.
Indeed, Buffett makes this point himself when he says that he always aims to stay inside his circle of competence when investing. His circle of competence and mine are not necessarily the same.
Coca-Cola shares – or other Coca-Cola shares?
It is also worth understanding what I meant when I said “Coca-Cola shares” above.
That may sound odd, but in fact Coca-Cola is a complicated company.
The Coca-Cola company itself makes a formula and sells it to bottlers, among other tasks. Those bottlers (sometimes part-owned by Coca-Cola) are basically the front end of the business in their local markets, running factories, distribution networks, local advertising campaigns, and the like.
It may seem easy to say Coke is Coke. In reality, though, these are quite different businesses occupying distinctive spaces in the value chain.
Over the past five years, for example, New York-listed Coca-Cola (the share Buffett owns) is up 26% and it now yields 3.3%.
Coca-Cola Europacific Partners, also listed in New York, is up 32% and yields 5.4%.
Meanwhile, that period has seen London-listed Coca-Cola HBC decline 7.6%. It yields 2.7%.
Where is the value?
Those different share price performances reflect a variety of factors.
As an investor, I am always trying to get more value than I pay for when I buy shares.
I like where Coca-Cola sits. It is basically the master franchisee and can sell its formula without needing to engage too much with the on-the-ground challenges of getting products in the hands of shoppers from Manchester to Mogadishu.
That is a highly lucrative business model for Coca-Cola itself. It has a strong brand, proprietary formula and protected trademarks.
There are risks, such as shifting consumer preferences hurting sales of long-existing products. The setup also means that while bottlers need the main company, the main company is also reliant on bottlers to deliver its business. But local difficulties from water shortages to civil unrest can get in the way.
Buffett isn’t buying now
Despite the risks, Coca-Cola has been a spectacular investment for Buffett.
So why has he not bought any shares since 1994?
I do not know. Maybe he is comfortable with the size of his existing stake. Or maybe he no longer sees the price of Coca-Cola shares as attractive.
The rising share price also means that the company now trades on a price-to-earnings ratio of 24. That does not look cheap to me.
So, for now, I have no plans to buy Coca-Cola shares.
