Over the past ten years, Coca-Cola has increased its profits from $5.0 billion to $9.2 billion. The profits per share have increased by a little more than that (from $1.03 to $2.10) due to a stock repurchase program that has reduced the number of ownership units you have to share the profits with from 4.8 billion to 4.3 billion. The company has increased its cash on hand over the past two years from $13 billion to $18 billion. The soda giant’s sales have gone up from $21 billion to over $46 billion during the 2004-2014 stretch. And plus, you collected a rising cash payment during each of those years we’re examining (and it’s a streak that now goes back more than half-a-century in total).
And yet, the price of Coca-Cola stock has declined over 5% this week. Why? Because the company missed analyst expectations by $140 million. That’s right—they brought in a little under $12 billion when the Wall Street consensus expected a little over $12 billion. It’s nuts; we seem to have entered this bizarro world where investors are intolerant of the fact that we have economic business cycles, and companies don’t grow revenues and earnings per share at a 10% rate annually into perpetuity. Profits went down from 1998 to 1999, only went up by $0.03 from 2001 to 2002, only went up $0.05 the year after that, and $0.06 the year after that. The company’s revenues barely went up from 2004 to 2005, but yet, experienced significant growth from 2007 to 2008 (earnings per share increased from $1.29 to $1.51, and revenues grew from $28 billion to just a tad under $32 billion).
It’s the nature of business. There’s a sportiness to the earnings reports of even the highest caliber companies, and you would be wise to take advantage of the temporary ebbs in the business cycle to add to your position, rather than waiting for the company to fire on all cylinders: When do you think you’ll be able to get a good deal on Coca-Cola stock—when the company reports sales that are stagnating, or when the company reports profit growth of 12%?
Someone who bought shares of Coca-Cola on October 21st, 2004 would have compounded his funds at a rate of 10.62% annually until October 21st, 2014, increasing your wealth by a rate of 2.74 if you held the stock in tax-shielded form like an IRA. Every $10,000 would have grown to $27,400. And this is a ten-year period that included all the things mentioned below—years that included modestly growing revenues and barely increasing profits per share. Heck, even this year, Coca-Cola is on pace to grow its profits from $2.08 to $2.10, and the per share dividend collected increased from $1.12 to $1.22.
This is what’s supposed to make investing fun—even in the bad years, Coca-Cola’s profits generally hold up (increasing modestly or declining modestly) and the payout ratio is flexible enough that you can still receive dividends that are growing faster than the inflation rate even during the rough years of the business. The current business difficulties, if you can call it that, facing Coca-Cola are perfectly characteristic with what Coca-Cola has done in the past ten years and still managed to deliver total returns just north of 10% annually (as an FYI, the current yield on Coca-Cola is 3.0%. The years 2008 and 2009 are the only times in the past generation when Coca-Cola had an average initial yield of over 3.0% over the course of the year. There aren’t a whole lot of high certainty places in the world where you can get 3% initial income attached to a very high probability of 8% annual dividend growth or better over the long term).
It’s a shame the financial literature out there right now misjudges the opportunity that exists in IBM and, to a lesser extent, Coca-Cola right now. If you’ve googled Warren Buffett’s name at all this week, almost all the headlines are about how he has supposedly lost $2-$3 billion in Coca-Cola and IBM this week, and a small minority of them even go as far as to suggest that he’s losing his edge as an investor. It would be humorous if not for the fact that honest, hard-working people actually make financial decisions in response to that kind of stuff.
Coca-Cola has a ten-year earnings per share growth rate of 8.5%. IBM has a ten-year earnings per share growth rate of 13.0%. The current criticisms of IBM and Coca-Cola discuss conditions that both companies have faced throughout the past decade, and still managed to deliver good returns to shareholders.
This is why I have a love-hate relationship with advances in financial information technology. On one hand, it’s great that someone just starting out can open an account with Loyal3, and start buying Berkshire Hathaway stock with $10 purchase minimums for a cost of $0. It’s a sign of progress for American society that the path to wealth-building so clearly exists if you acquire the knowledge and set aside a little capital to invest. On the other hand, we have a 24/7 news cycle that reacts to every quarterly report, such that it’s rare you find anyone around anymore who can say stuff like, “Yeah, I’ve owned these shares of Emerson Electric for the past 25 years.” When you have information blasted your way all the time, and some of it is negative, it’s extraordinarily easy to dispose of an excellent lifelong holding because you made the mistake of projecting short-term bad news far into the future when really all you’re looking at is the typical ebb and flow of the business cycle.
Originally posted 2014-10-22 12:57:43.