When Coca-Cola initially went public in 1920, it quickly found itself in the position of being a $30 million compared that was generating $9 million in annual profits. The P/E ratio was somewhere around 3. Buying a young Coca-Cola after the IPO was one of the best investments that you could have made in history, with a round lot of 100 shares growing into almost $2 billion at the end of 2012.
The profits generated by the company have doubled thirty-eight times since the IPO, plus you got a dividend that has been raised every year since 1963 alongside stock buybacks in recent years that would amplify the total wealth created by this stock even further. The company has grown stronger, with a distributing network so vast that Dr. Pepper realized it would be cheaper to just let Coca-Cola transport its drinks in certain areas rather than try to distribute its own drinks everywhere. There are now over 500 nonalcoholic brands—water, tea, milk, sports drinks, soda, you name it, and Coca-Cola has a brand for it. The profit margins are obscene—usually hovering around the 30% mark (thought the actual reported figure has been around 27.5% post-2012 because it now owns some of its bottling operations which are more capital intensive, and this is reflected in the overall numbers).
What is interesting to me is this: The evidence is overwhelming that buying a large amount of Coca-Cola stock and holding it for a long time is a wise idea, yet people put up these mental blocks and decline to do it. You have Charlie Munger saying that, as soon as he is managing money somewhere, one of the first things that he does is put close to 20% of the portfolio into Coca-Cola stock. You have Buffett saying on the attached video that he will never sell any of Berkshire’s 400,000,000 shares. You have Donald Yacktman saying that it is the closest thing to a perfect business that he has ever studied. You have charts showing profits and dividends piling up year after year. It was the biggest soft drink company in 1920. It was the biggest soft drink company in 1950. It was the biggest soft drink company in 1980. It was the biggest soft drink company in 2010. It is the biggest soft drink company now. It continues to sprawl.
Someone that bought 100 shares in 2004 would have 128 shares today. Better yet, because the profits grew from $0.98 per share to $2.03 per share, the stock price went from $20 to $43. The dividend grew from $0.50 to $1.32. You got to acquire more shares as the business value increased. You would be collecting a nearly 7% annual dividend yield from the amount of your investment in 2004. Not bad for a company that is, if you follow the current conventions of the financial media, struggling.
It makes 80% of its profits overseas. The dollar has increased in strength. This lowers the amount of profits that gets reported to investors, even though it is not an accurate gauge of true business growth. The purchasing of the bottlers has required more cash than it ought to have. Soda volumes have declined by about 2% annually in North America, and this has put pressure on international soda growth, non-sodas everywhere, buybacks, and dividends to pursue growth. Not a parade of terribles when measured over the years.
What I like so much about Warren Buffett’s video when he discusses never selling Coca-Cola stock is that he mentions that great brands last forever. That is because they reap a certain benefit—the ability to charge premium prices. If I started a soda company and marketed it for $0.75 in a vending machine, people aren’t going to choose it over Coca-Cola for $1.00. And as Charlie Munger pointed out at the 2010 Wesco meeting, how on earth could undercut Coca-Cola on price? They have the vastest networks and bulk orders, and you would have to pay more for your basic raw ingredients. They only company that has really tried is Wal-Mart’s Great Value, and the soda offerings isn’t an area where the Great Value brands have established market share.
The Buffett video is broader than just a discussion of his affections for Coca-Cola stock. He also discusses the future of the United States at length, and his belief that someone being born in the U.S. today has been luckier than anyone born at any other time in the history of human civilization. There’s a lot of truth in that—it reminds me of James Altucher’s commentary that life in the United States is like a Shakespearean play—you can exit stage left and emerge somewhere else at any time, free to kill old ideas and pursue new things that will make you happier.
Of course, these things aren’t guaranteed—new studies are showing that Americans are starting to lose their entrepreneurial spirit, and are telling pollsters that they would rather have a job with a minimal chance of getting fired than they care about doing fulfilling work or making something out of nothing. Maybe that’s a coincidence of polling people in the extended aftermath of a deep recession? Who knows what goes into the heads of survey participants. I think of Ferdinand Schumacker—feeling broke and hopeless in Germany in 1852—and then leaving for Ohio at the age of 28, risking everything to help Henry Parsons Crowell launch an oatmeal company that we today know as Quaker Oats.
Even though I think, and Charles Murray’s data seems to confirm, that it is easier to have an ignited fire work ethic when you come from a lower or middle-class background than if you come from affluence, there are no rules that prevent you from being an exception. Henry Parson’s Crowell himself came from a family fortune, developed a sense of gratitude born out of evangelical devotion, and developed a wildly maniacal work ethic as his way of repaying God for the blessings bestowed upon him. When Buffett talks in the video about living amongst so much affluence, that nagging warning from Benjamin Franklin about too much prosperity triggers my mind. It’s hard to lead a productive life if you forget about cause-and-effect, delayed gratification, and the inherent value of earning something great. It seems to me that someone buying Coca-Cola today with money they themselves make can tap into John Pemberton and Asa Candler’s work ethic in generations past and use the proceeds from the growth of the business to carve out a more prosperous life for themselves.