Since 1995, the S&P 500 has created wealth at a rate of 8.88% per year. Coca-Cola, meanwhile, has compounded at a rate of 7.53%. A lot of that underperformance is due to the fact that Coca-Cola was absurdly priced, giving investors a starting earnings yield in the 3% range if they timed it well that year, but for a moment—let’s pretend that wasn’t the case.
Let’s just say that both the S&P 500 and Coca-Cola were fairly priced in 1995, and the S&P 500 won by 1.3% per year. Why on earth would someone hold Coca-Cola stock if it was having trouble matching a diversified collection of American enterprises that you could easily get your hands on for a 0.1% annual fee?
The answer generally has to do with two things: income, and the fact that you are buying an entirely different product that gives you downside protection in ways that might not even materialize.
In the case of Coca-Cola, the terms of the investment under most normal conditions is something to this effect: You are getting a starting dividend yield between 2% and 3%, and you are going to get an annual dividend growth rate somewhere between 8% and 12% usually. Those terms do not exist with a S&P 500 investment. The S&P 500 yield is often lower, and the dividend growth has not outpaced Coca-Cola for any meaningful period of time that I have studied.
That’s an important distinction because, for some of you, the income generated from a holding is going to be the only fruit of the investment that you receive before you die—the net proceeds go to children, charities, and so on. Well, if you are going to be living off the income, it is important to do it right. That’s where the style of Coca-Cola comes in handy—every year, you know you are getting a dividend increase that is usually double or triple the pace of inflation. That’s the real benefit to you, as someone who knows that taking a dividend check and spending it is the ultimate benefit you’re going to be receiving from the security.
The other thing has to do with style during recession. Occasionally, the S&P 500 blows up in a big way. Look at what happened to the underlying profits of the S&P 500 when the banks collapsed in 2008 or the tech bankruptcies began to hit hard around 2000 (especially take a look at what happened to the Nasdaq index). You saw something not quite as bad in 1990-1991 with some of the larger banks like Wells Fargo, and if you’re really feeling old-timey, you can see the 25% cuts in profitability that occurred in 1973-1974.
The worst year for Coca-Cola, meanwhile, in the past three decades was this: the company made $0.71 per share in profit in 1998, and then made $0.65 per share in profit in 1999. That’s it—an 8% decline in profitability one year. That was the toughest storm you had to navigate. Coca-Cola investors have never had to deal with a two-year period in which profits did not grow during the three-decades worth of data that I studied. That’s because when you’re flavoring water with 500 brands that mean something to people while earning 28% returns on equity, a whole lot has to happen for profits to decline. A little 2% decline in soda consumption in North America isn’t the iceberg that’s going to take down this ship. If you ever want to know why Buffett, Munger, and Yacktman can’t talk about this company enough—look at the numbers. It goes up, up, up. More dividend income, more profits. Every year, with only an exception every decade. As for the dividend payout, there have been no exceptions since shortly before JFK’s assassination.
Even if someone bought Coca-Cola today and underperforming the S&P 500 by a bit for the rest of their lifetime, it still wouldn’t be a failure. The company is doing something special with how it generates profits, and how a cut of those profits gets handed to investors. There aren’t a whole lot of places in life where you can reliably grow a dollar in income by 8% this year, 10% next year, 9% the year after that, and then 11% after that, into perpetuity. It’s a style of wealth creation; as the saying goes, “Don’t knock it until you try it.” If you own an asset that keeps giving you more and more money each year, you’d be loathe to get rid of it because it makes your life easier, and keeps taking care of you more and more with each passing year.