The Sky View Of Concentrated, Permanent Coca-Cola Wealth

During the past twelve months, over 6% of this website’s traffic has come from people living in Atlanta, GA or its nearby suburbs. The city of Atlanta holds its own against the other heavyweight generators of this site’s traffic—like the entire states of Texas, New York, and California (though the number of California residents that read this outnumber the Atlanta residents by a bit). That is not a coincidence: From what I can tell, just about every Atlanta reader that finds his or her way to the site does so by googling something about Coca-Cola as an investment, and I’ve been lucky to have many of you stick around.

More interestingly, I’ve been fortunate to trade e-mails with some of you who are sitting on very, very large ownership stakes in Coca-Cola, and spend a lot of your time figuring out what to do with it. When you have a company with 4.4 billion ownership units that has been growing profits for 77 out of the past 82 years (with dividends rising for 51 years straight currently) and combine that with Atlanta’s historical culture of treating “Thou shalt not sell thy Coca-Cola stock” as an 11th commandment of sorts (or maybe it’s just an extension of the 5th?), you can’t help but end up with something that produces massive piles of cash.

The mathematics of compounding go crazy—haywire—if you reach a point where your dividend income equals your annual expenditures. This is particularly so if the bulk of your wealth comes from something like Coca-Cola, which has a twenty-year record of giving investors income increases that amount to 9.63%, roughly three times the prevailing rate of inflation in the U.S. If Coca-Cola continues to give investors dividend increases at that historical rate, you’d find yourself in a situation where $60,000 in Coca-Cola income today would become $1,066,155 in annual income thirty years from now. It’s a wildly different scenario from annuity world, pensions, 3% U.S. government bonds, and the other hallmarks of retirement planning that focus on avoiding the occurrence of a $0 bank balance before you die. Someone spending the last thirty years of their life drawing on Coca-Cola dividends could see a doubling, then another doubling, and yet another doubling, of their annual income and die with a $35 million estate just based on their blocks of Coca-Cola ownership alone.

Also, I have happened to personally like the investors I’ve encountered who own stock in The Coca-Cola Company. It’s nice encountering people who have a sense of general contentment about them, which tends to naturally arise in people who have chosen the right spouse, the right career, or in this case, the right permanent investment in life. When you own something that generates profits in over 200 countries, has over 500 brands, generate 30% returns on equity, has been raising its dividend every year since the death of C.S. Lewis, and has distributorship networks so vast that executives at Dr. Pepper reach out and say “hey, you mind if we partner with you to sell our stuff?”, you’re not going to get caught up in whether the price of the stock is $50, $45, $40, or whatever. The shares aren’t for sale.

And if you’re reinvesting your dividends and follow the company closely enough to be aware that it is repurchasing its own stock, then you probably actively are rooting for the price of the stock to go down, so you can acquire even more shares at a discount and your existing shares will become more valuable as each dollar Coca-Cola devotes to its buyback program retires even more stock and ties your ownership interest to a higher profit per share figure.

You should note that I said you should root for the price of the stock to go down in such a situation, not the business fundamentals. I hope profits grow from $2.20 to $2.80 while the price of the stock goes from $44 to the $30s—it is the act of reinvestment and the initiation of new purchase orders in response to this growing spread between business fundamentals and the price of the stock that you become the farmer planting his seeds in increasingly fertile soil.

On another personal note, I am glad that many of you Coca-Cola shareholders that I’ve encountered are thoughtful about ways in which your wealth can be used to help those who, in the words of Warren Buffett, did not win the ovarian lottery and instead find themselves born into situations that are reminiscent of Hosea, Chapter 4: “My people are destroyed by a lack of knowledge.”

It’s wise to think of investing as a two-stage process. The first focus is on reaching financial independence, and taking more-than-reasonable precautions to make sure that condition can last the rest of your life. This is not a manifestation of greed, but rather, the desire to live your life as you see fit and doing things that you want to do rather than have to do. Once that mission is accomplished, you begin to turn your eye outward as you recognize that you can be a tremendous force for good or bad depending on which impulse you choose to follow. In a very real way, a few of you reading this are Coca-Cola princes and princesses as you sit on tens of thousands or even hundreds of thousands of shares in the company’s stock, and every three months, you receive a check in the six figures that can have a profound influence on your community. It’s not my place to tell you which way to allocate it, as I don’t know your value system and preferences. It’s your life, and you get to spend it gradually writing your own obituary as you see fit.

For those of you reading this who own Coca-Cola and find yourself with 70%, 80%, or 90% of your money tied up into the legendary beverage maker’s stock, I understand your concern about diversifying—buying almost anything else reeks of diworsification rather than diversification. However, almost no companies does not mean the same thing as saying there are no other companies out there that could be good candidates for consideration. Why not adopt the practice of putting dividends elsewhere, looking perhaps to Colgate-Palmolive, Nestle, ExxonMobil, Johnson & Johnson? Those are ways to diversify without sacrificing earnings quality or future growth prospects.

Now, for my non-Atlanta readers, who may or may not own Coca-Cola stock: The usual disclaimers apply. It’s an important to find an investment style that fits your own temperament. Heck, I know some of you could never bring themselves to own the same company stock for three years straight. That’s perfectly okay. As the writer Steven Pressfield said, “Our job in this life is not to shape ourselves into some ideal we imagine we ought to be, but to find out who we already are and become it.” (Hat tip to Stiles Mikell Harper III for alerting me to this quote). If long-term investing in the same stock isn’t for you, there are tons of other finance sources you can read. As for me, the appeal rests in making decisions that have long measuring lifes; finding anti-fragile businesses with high permanent returns on capital, establishing an ownership position, and then enjoying the growing cash payments that arrive four times per year thereafter. Those are the potential rewards when you approach the investment altar without a sale price in mind.


Originally posted 2014-10-10 16:57:05.

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