The Coca-Cola Company

A dividend growth story

The history of Berkshire Hathaway’s Coca-Cola position is straightforward: they bought some shares in 1988 ($593 million), 1989 ($431 million), and 1994 ($275 million), for a total of ~$1.3 billion ($3.24 per split-adjusted share). There has been no activity since, aside from collecting dividends.

I estimate that Berkshire has collected about $9.7 billion in dividends to date. If Coke went out of business tomorrow and the stock went to zero, Berkshire would have realized an IRR of around 11% and a MOIC of 7.5, all from dividends. Amazing! At the current rate, Berkshire receives $704 million annually from Coke dividends: 54% of its cost basis.

As of the time of this writing, Coke was trading around $63 per share. If Berkshire were to sell the position, it would bring the total IRR to around 14% and the MOIC up to 27 (pre-tax). This demonstrates the power of compound interest: a 3% increase in IRR increases the MOIC from 7.5 to 27, since the time period is over three decades.

My initial (simple-minded) reaction to seeing a 14% IRR was that it must be a below-average Berkshire investment, considering Berkshire has compounded at 20% since Buffett took over in 1965. However, IRR ignores two things. One is the use of float to fund part of the position, which has provided Berkshire with massive amounts of negative-cost leverage. The other is that IRR assumes dividends are not put to use elsewhere - in reality, Berkshire has invested a chunk of the $9.7 billion of dividends into other opportunities, generating further returns. So, considering these factors, the rate of return accruing to Berkshire shareholders is much higher (but impossible to calculate).

At the 2006 shareholder meeting, Buffett said “you can fault me for not selling the stock… clearly at 50x earnings it was a silly price”. In mid-1998, Coke got all the way up to >$40 per split-adjusted share. I estimate that at that brief moment, the IRR of the investment was 35%, while the IRR from that point to present has been just 3.5%. I suppose the takeaway from this is that even the best businesses can turn into bad investments depending on the price. However, it can be difficult to say when a great business has become definitively overvalued. The ability to find a home for the sale proceeds and taxes complicate the decision further. Nevertheless, Coke has been an enormously successful investment for Berkshire, and it will continue to deliver billions of dollars to Omaha over the coming decades.