Updated Dec 1st 2013 8:32AM
Warren Buffett is Coca-Cola's biggest shareholder. Berkshire Hathaway owns 400 million shares of the soft drink giant, a stake worth nearly $16.2 billion. PepsiCo is nowhere to be found in the legendary investor's portfolio.
Buffett began accumulating shares of Coca-Cola in 1988 when the stock was trading between 14 and 15 times earnings -- hardly a price that screams "value!" But Buffett saw a company that was on the verge of massive shareholder creation -- even more than had occurred in the past.
Coca-Cola went on to become one of Buffett's greatest investments. Moreover, the conditions that made Coca-Cola a great investment in the late 1980s still exist today -- making it a potentially great investment for the current generation.
Two keys to Buffett's investment in Coca-Cola
In 1988, Coca-Cola had two key attributes that made it an appealing investment: pricing power and untapped growth. The pricing power should have been obvious to anyone. Brand loyalty enables Coca-Cola to raise prices without worrying about a sharp drop-off in sales volume.
For the most part, people who drink Coke only drink Coke; Coke drinkers will not drink a Pepsi just because it is a dime cheaper. The same is true for many of Coca-Cola's brands -- then and now. This is an invaluable trait that few companies have -- but that most of Buffett's investments have. Pricing power creates value for shareholders like no other.
Investors, then and now, could be forgiven for not seeing the second attribute that makes Coca-Cola a wonderful long-term investment. Let's see if you can spot it. Look at the chart below; look at the black bars (per capita Coke consumption in 1992) and then look at the green bars (per capita consumption in 2012). What would make Buffett think Coca-Cola had significant untapped growth?
Source: Coca-Cola
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| Warren Buffett |
