Very recently, Warren Buffett has had Berkshire Hathaway reduce many of their consumer stocks holdings. But the one stock they have not reduced at all in the consumer sector is there shares of Coca-Cola.
We have learned over the years that Warren Buffett is a big fan of growth in emerging markets, which he recently demonstrated a few years ago when he picked up Burlington Northern Santa Fe railroad. This railroad transports coal to various ports on the West Coast, which it then ships to emerging market countries, and also India which he recently visited. But we learned recently that he is also a lightning up the Berkshire Hathaway holdings on consumer stocks, and Kraft Foods is one such company where Berkshire cut back their shares.
The reason why Berkshire Hathaway and Warren Buffett made this decision is that they feel the American consumers are going to start purchasing more generic names during this economic crisis, as opposed to sticking with the brand name companies like Oreo, which we all know is a product from Kraft. But Warren Buffett has decided to hold his very large, long-term position in Coca-Cola, and hasn’t cut back at all for plenty of good reasons. The main reason being they have an 18.49% profit margin, and the dividend yield of Coca-Cola is 2.60%. So the total overall return for investors has been very rewarding.
Much of the profit at Coca-Cola originates from emerging market consumers. Coca-Cola presently has products which are bought and sold in every single country throughout the world, except for two. The only countries they are not in are North Korea and Cuba. Coca-Cola also just began operations in Myanmar, formerly known as Burma, just recently. They were absent for over 60 years.
It is expected that the emerging market consumer class is going to reach about $30 trillion in spending by the year 2025. This is all according to a report put out by McKinsey & Co., which is a global consulting firm. Coke is in a great position to capitalize on this expanding affluence. The middle-class in these emerging market countries still continued to grow even in the middle of the Great Recession. Consumer spending is expected to be about the current total for the entire world by the year 2025.
There are obviously going to be plenty of competitors for Coke, but none of them have come even near to knocking them down as the king of consumer beverages. Warren Buffett says, “If you gave me 100 billion and said, ‘Take away the soft drink leadership of Coca-Cola in the world,’ I’d give it back to you and say it can’t be done.”
Coca-Cola shares have risen more than 20% over the last year. Even with this advance, the short float is actually tiny. Coke is now trading at about $38.80, and the mean analyst target price projected over the next year is only $41.63.