When Warren Buffett purchased Coca-Cola stock, a purchase that took place between 1987 and 1994 with the most intensive buying occurring in 1988 and 1989, he managed to acquired 400 million shares at an average price of $3.25 per share. Discussions of this successful investment focus on the fact that the $3.25 has grown into $42 over a 20+ year time span.
What gets less attention are the dividend payouts which are sent to Berkshire’s headquarters as cold, hard cash. Every 90 days, Warren Buffett receives 10% of his initial purchase price back when he gets sent a check for $140,000,000.
The superficially exciting number will be when Coca-Cola’s quarterly dividend hits or crosses the $0.8125 mark sometime in the early 2020s. That will mark the moment when Berkshire Hathaway shareholders collect as much in a given year from their dividends as Buffett initially made to fund the investment. It is not an economically perfect comparison, as you would have to adjust it for inflation, but the quirk of the mind that makes us think in terms of nominal dollars is as good a moment as any to reflect on the lessons from this investment.
If you find a thriving business while it is in its prime, it is stunningly foolish to sell it because it gets a bit overvalued or it goes through a rough period. I suspect the shareholders of Colgate-Palmolive and Nike right now will find themselves in a position in the 2040s that Warren Buffett and Berkshire Hathaway shareholders currently enjoy with Coca-Cola.
According to Yahoo Finance (take it with a few grains of salt!), Warren Buffett’s share count in Coca-Cola would be 1.2 billion right now if he had been reinvesting along the way (of course, reinvesting really just means taking the cash dividend and putting an open market order for more shares every ninety days). At that point, he’d be collecting $1.6 billion per year in Coca-Cola dividends. It’s monopoly money any way you run the calculations, but the results get even more extreme when you apply the three-fold share count multiplier that dividend reinvestment would have produced.
I am thankful that Warren Buffett has held Coca-Cola for all of these decades. It is just about the only publicly known example of a business buying a stake in another publicly traded corporation and holding it in true buy-and-hold fashion. Otherwise, you are limited to the abstract studies of what could have happened. I think this staggering results of a long-term Coca-Cola investment in terms of dividend income alone is important to keep in mind if you are tempted to sell your stake in a business that presently appears to be moderately overvalued. If you have chosen the business well, a small bit of compression is still worth the trade-off in order to achieve an end-game like Buffett has with Coke.
Originally posted 2017-01-25 22:00:15.