Warren Buffett is taking a lot of heat.
Teaming up with 3G Capital to buy H.J. Heinz and now Kraft Foods Group (NASDAQ: KRFT) has had some backlash. Then of course there’s the scrutiny over lending practices for his mobile-home company, Clayton Homes.
The media also likes to focus on Warren Buffett’s stocks. His Berkshire Hathaway (NYSE: BRK-B) portfolio is heavily concentrated in “boring” companies that aren’t as sexy as what other billionaire managers, like Carl Icahn, are investing in. But these old companies, like Wells Fargo (NYSE: WFC) and Wal-Mart (NYSE: WMT), have spent decades building up wide economic moats.
However, many of his big investments have been under pressure this year. This includes IBM (NYSE: IBM) and American Express (NYSE: AXP), both down over 7% for the last 12 months.
The Trouble with Coca-Cola
And what about his other major holding, Coca-Cola (NYSE: KO)? Is it losing its luster too?
If you ask Wintergreen Advisors’ David Winters, the answer is “yes.”
Winters had owned shares of Coca-Cola for over six years, with a stake in excess of 2 million shares for the last three years. However, per the quarterly 13F SEC filings released this month, we found out that Winters is cashing in his chips and dumping close to 70% of the Coca-Cola shares Wintergreen Advisors owns.
Winters had been fighting a years’ long battle at Coca-Cola to change management compensation practices. It was a fight in which he was unable to gain much support. Even Buffett said the pay was excessive, but he refused to actually vote on the matter at the shareholder meeting.
Buffett’s loyalty to Coca-Cola stems from his role as a long-time shareholder after sinking over half a million dollars into the beverage maker in the late 1980s. His stake is now worth over $16 billion and he owns more than 9% of the company.
I opined back in March that Buffett loved Coca-Cola not just because he drinks five Cokes a day. It’s a bet on beverages and one of the purest plays around on that market. Unlike PepsiCo (NYSE: PEP), Coca-Cola doesn’t have a snacks business and is getting deeper into beverages with its investments in Monster Beverage (NASDAQ: MNST) and Keurig Green Mountain (NASDAQ: GMCR).
Coca-Cola Is Still a Dividend Play
For a $180 billion market cap company, finding “needle moving” growth opportunities isn’t easy. Hence the direct investments into Monster and Green Mountain. But Coca-Cola still has the opportunity to boost margins with a refranchising of its bottling system in the United States. The bottling business has much lower margins than its core concentrate business, so a shift away from that should boost margins in the long term.
Beyond that, Coca-Cola is still a dividend play, pure and simple.
It’s offering a 3.2% dividend yield at a time when the S&P 500 average dividend yield is a mere 1.9%. It’s upped its dividend for 52 straight years. For context, Coca-Cola’s dividend yield is a full 300 basis points above chief competitor PepsiCo.
Everyone still drinks beverages, whether it’s sodas, juice, sports drinks, coffee, tea or energy drinks. There are not many companies that have the reach and moat that Coca-Cola has. Beverages are also a much better business than snacks in terms of margins – hence, the reason Coca-Cola enjoys a net profit margin that’s 50% higher than Pepsi.
Coca-Cola will likely remain a staple in the Berkshire portfolio for as long as Buffett is around. Although the market would have you believe that some investors have lost confidence in Coca-Cola of late – including David Winters – the company still has plenty of capacity to continue paying a healthy dividend, while shifting its focus to faster-growing markets in emerging economies.
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