Warren Buffett-led Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) has owned Coca-Cola (NYSE: KO) stock for decades. Coke is, without a doubt, one of Buffett's best investments ever, as the position's value has increased several fold while paying a steady stream of passive income.
Although typically a stable stalwart, Coke stock is down over 12% in the last month, erasing most of its year-to-date gains. Here's a look at why Coke is selling off and if it is a dividend stock worth buying now.
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Time-tested positions
Coca-Cola and American Express(NYSE: AXP) are two of Berkshire's longest-held positions. Combined, they make up over 23% of Berkshire's public equity portfolio. In recent annual letters to shareholders, Buffett has praised both companies' consistent ability to repurchase stock and grow dividends.
Buybacks increase existing shareholders' stakes in a company without buying more stock. For example, if a company has 100 shares, then each share represents 1% ownership. However, if the company uses excess earnings to buy back and retire 20 shares, then there will be only 80 shares. Investors that held one share and did nothing now own 1.25% of the company instead of 1%.
Better yet, if the company raises its dividend every year, each share will generate more passive income. What results is a snowball effect where loyalty rewards greater ownership and more passive income -- which is precisely what has benefited long-term holders of Coke and American Express.
Neither company is perfect. Buffett has noted mistakes both companies have made with overexpanding and times when their management made other blunders to the detriment of shareholders. But Coke and American Express are such good businesses that they are hard to mess up beyond some short-term challenges. To quote Berkshire's 2023 letter, "The lesson from Coke and AMEX? When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable."
Coke is a passive income powerhouse
Coke remains one of the best dividend stocks for generating stable passive income. It has 62 consecutive years of dividend raises, making it a Dividend King. It also has a compelling yield at 3.1%, whereas many excellent companies that have consistently raised their dividends don't yield nearly as much.
Coke has a diversified nonalcoholic beverage portfolio that covers all the major categories, from soda, to tea, coffee, juice, sparkling water, water, sports drinks, and more. It also has a global business. For the nine months ended Sept. 27, 2024, North America comprised 39.3% of consolidated revenue and 43.4% of consolidated operating income. North America remains Coke's largest market, but it is no longer bigger than sales or operating income outside North America.
In addition to being highly diversified, Coke achieves excellent operating margins thanks to a sophisticated supply chain and network of bottling partners. By outsourcing elements of its production and distribution, Coke can be flexible and tweak its beverage lineup based on regional demand trends.
Despite its advantages, Coke isn't immune from risks. Its sales, as measured by unit case volume, declined in the recent quarter. Coke has relied on price increases and some standout beverage brands to drive earnings growth. However, there are limits to price increases, especially if consumer demand continues to fall.
Coke's global reach helps offset regional slowdowns but can also be a drawback due to currency risks. Since Coke makes most of its money outside the U.S., a strong U.S. dollar can mean lower earnings as Coke converts sales made in foreign currencies to dollars.
The ICE U.S. Dollar Index tracks the dollar's value compared to a basket of foreign currencies. In late September, the index came close to hitting a 52-week low. But in the last few days, the index blasted to a new 52-week high, likely in response to the impact that Trump administration policies could have.
All told, Coke's sell-off is mainly due to a disappointing earnings report and fears that earnings could decline over the short term due to weakening demand and a strong dollar. The good news is that Coke is a great value, even if its earnings fall from here.
As you can see in the chart, Coke's price-to-earnings (P/E) ratio is now below its historical average over several different periods.
KO PE Ratio data by YCharts
The forward P/E ratio looks dirt cheap but should be taken with a grain of salt, given that the consensus analyst estimate for Coke's earnings could come down due to the aforementioned concerns.
It wouldn't be surprising if Coke continues to fall in the short term because so many factors are working against it. However, investors may get an excellent chance to buy Coke on sale, and it's still a great long-term bet. It's also worth mentioning that lower demand and a strong U.S. dollar would more so ding Coke's earnings rather than derail them. Coke is an extremely solid business with a top-tier balance sheet, making it more than capable of raising its dividend even during times of declining earnings.
Still, risk-averse investors may be even better off simply buying Berkshire Hathaway stock directly.
Berkshire's bastion of cash
Berkshire Hathaway famously doesn't pay dividends because Buffett believes a better use of capital is reinvesting in the existing business, new businesses, or repurchasing stock. This formula has worked masterfully over time, given Berkshire's long-term returns.
In addition to its public equity portfolio, Berkshire owns various insurance businesses, BNSF railroad, Berkshire Hathaway Energy, and a variety of manufacturing, retail, and other businesses.
Berkshire has been a net seller of stocks in 2024. Noticeable reductions in Apple, Bank of America, and other positions have contributed to Berkshire's cash and Treasuries position, which has ballooned to a whopping $325 billion -- making it worth more than Berkshire's entire equity portfolio.
Investing directly in Berkshire Hathaway gives investors access to a diversified portfolio of steady and boring businesses. Berkshire can use its treasure trove of cash to buy stocks cheaply if there is a sell-off, or make a timely acquisition.
Two stocks worth buying now
Investors looking to supplement income in retirement or generate a predictable flow of passive income may still prefer Coca-Cola over Berkshire Hathaway.
Either way, Coke and Berkshire Hathaway are solid, safe stocks to consider now. Coke has a phenomenal track record of raising its dividend, is well positioned to fund dividend raises even if its earnings fall, and has an attractive valuation. Berkshire also has a diversified portfolio of safe businesses and plenty of cash to navigate challenges.
Perhaps the best course of action for investors looking for balance is a 50/50 split of both blue chip stocks.
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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
