You can tell what I’m studying because I become completely, totally, hopelessly obsessed with it; the recent posts about the structure of the bottlers, the biographies of past executives, the SEC disclosures, the look inside the factories, the custodial trusts for the nieces and nephews and the DRIP for my sister, the discussion of deferred taxes as a way to leverage investment returns without debt, and now, even the Christmas tree. It’s always Coca-Cola.
Growing up, all the old people around me talked about how magical it was, so I sort of put up a block about it; “yeah, yeah … buy Coke”. My grandmother had a friend who had been purchasing it for decades – he lived in a trailer, yet unbeknownst to most around him, he was sitting on $2 to $3 million in shares at the time, if I remember correctly (I think his kids sold them when he died. If they hadn’t, they’d be worth $6 to $9 million today). Warren Buffett was up in Omaha talking about it incessantly. But by the time I was a teenager and earning my own money, the stock was at 50x earnings. That wasn’t interesting to me. How could I buy Coke at 2% earnings yield when I could earn 3x that amount parking the funds in plain ‘ole United States Treasury bills?
It’s taken nearly 15 years since the 1990’s stock bubble, but that overvaluation has largely burned off so the shares are now within striking distance of intrinsic value (not cheap by any means – I’d give them a C+ on valuation at the moment, but if they were to fall about 25%, I’d bump that up to a B+ … I’d like to see them at 13-15x earnings). In a testament to the quality of the business, even the overvalued shares during this period still handily beat inflation so you increased purchasing power by buying them at very foolish prices. So I started looking. And it’s like I see it for the first time in my life. There really is no other enterprise on the planet with this kind of economic engine. It’s hidden under all the bottler transactions and some of the other accounting, but it’s breathtaking. Magical doesn’t even begin to describe it.
I now understand why Charlie Munger has said if he were running an institutional money management business, there wouldn’t be a single account under his control that didn’t have at least some Coca-Cola. That always seemed odd to me, but it’s right there, in the numbers. I mean, I remember 10, 12 years ago sitting in Omaha during a Berkshire Hathaway meeting as they went on and on about Coca-Cola, thinking, “We get it. It’s a good business. Get on to the insurance operations.”
What was it the old hymn writer said upon his conversion and repentance, alluding to Saint Paul? “I was blind, but now I see?” It was right in front of me the whole time.
That underlying, intrinsic performance has translated into real world success. I talk about 50 years being an investment lifetime, and thinking in 25-year time periods (if you’re normal, you’ll get a bit more than two of these in your life, whereas if your parents or family members began investing for you, you’ll get to capture three or more, based on life expectancy). Let’s go back and look at half a century ago. What would Coke have done for an owner over an investing lifetime?
A 50 Year Look at Coca-Cola Shares
It’s December 10th, 1963. Coca-Cola closed at $115.62 per share on the New York Stock Exchange. Let’s say you spent your dividends along the way, so none of them were reinvested. Adjusting the cost basis for subsequent splits and cash dividends received, your net cash investment for every share of Coca-Cola would now be 32¢.
Yes, $0.32 per share. The stock opened this morning at $40.26 per share.
Let that sink in for a moment. You’d be collecting almost as much per quarter in cash dividends as your cost basis.
Nobody notices because it’s so boring; so ubiquitous; so “oh, my grandpa buys shares of Coke”. The inflation hedge inherent in the empire, both from a currency perspective and from the nature of the product, plays a big role in this. Management pays attention (according to the most recent conference call, the average cost of a serving of 8 ounce Coca-Cola at retail in the world today is $0.25. That is up over 5% from two years ago, and over 10% from three years ago, which is better than the domestic inflation rate. That means a 24 pack of 8.5 ounce Coca-Colas should cost around $6.38 at retail. It costs almost nothing to manufacture, especially once the basic volume thresholds are exceeded on the bottling operations.)
You never actually seem to see Coca-Cola making you richer, but you look back decades later and it has. It’s the most bizarre thing. It’s like General Mills in that sense.
My Christmas prayer this holiday season could best be summed us, “Dear Lord, please send us a 1973-1974 level crash event with no human mortality (contain it to the financial markets) so I can buy Coke at 5x earnings. I’ll gladly look at 75% paper losses on my existing holdings if you give me a chance to buy at those levels. Amen.”
I’ll stop talking about it soon, I’m sure, but I still have nearly every book on the company being shipped to me. Give me a couple of weeks.
In the meantime, I’m modifying my investment policy manual to state that unless the earnings yield on the Coke shares are less than 1/3rd that available on long-term Treasury bonds, they can never be sold short of an emergency or some sort of significant portfolio allocation risk scenario. Every share of Coke I buy from here on out, I hope to still own when I die (God willing) as a very old man.
I’m almost entirely certain I’ll put the stock in a stand-alone trust that prohibits it from ever being sold, and allows my children and grandchildren to only spend or invest the dividends. If the unthinkable happens and it fails, too bad. I’ve said it before, but I consider myself in the business of looking at probabilities and arranging my family’s affairs so that we have the greatest chance of benefiting from them, while adhering to our moral principles. In almost all cases, heirs who diversified away from the main money maker ended up poorer than they otherwise would have been. It turns out Milton Hershey knew what he was doing when he created the Hershey Trust Company.
The thing I find most fascinating is that most of you will read this, and then promptly dismiss it. It’s the nature of the holding. It’s almost too easy. Get back to me in 50 years.