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Why Buffett Likes The Coca-Cola Company (KO)… and Not Just the Drink

Now, Coke owns and operates over 90% of its North American business enterprise and can respond to consumer demand more rapidly.

Cash and dividends, another Buffett staple

With a beta of only 0.34, Coke’s risk is comparable to its rivals. The firms are not incredibly risky during market fluctuations. With operating cash flow of $10.63 billion as of April 30, Coke further distinguishes itself because it has the ability to adjust to unforeseen market conditions. The soft drink giant also offers a dividend similar to Pepsi and Dr. Pepper Snapple Group.

Surging forward, a Buffett favorite

Perhaps Coke’s most impressive characteristic, though, is the established company’s ability to grow.

Coke has not missed an earnings forecast for more than two years, and it exceeded analyst forecasts for the first quarter. While US sales are stagnant due to flat growth, Coke is seeing rising sales in emerging markets and volume growth in growing regions like India, Russia, and Brazil. Chairman and CEO Muhtar Kent is, “pleased with our first quarter performance results, having once again delivered solid growth against the backdrop of a still uncertain global economy.” Coke shows no signs of slowing down, even in a volatile market.

Dr. Pepper Snapple Group, however, only operates in the Americas. And as of the first quarter, only 3.6% of its operating profits came outside of Canada and the U.S. If the North American market stagnates or sinks, its investors will not be pleased with the results.

Even though Pepsi is investing in growth and emerging markets, Pepsi cannot compete on the same level as Coke because its product offering is two-tiered. Snacks comprise about 51% of Pepsi’s revenues, while beverages comprise about 49% of revenues. In addition to Coke’s superior economies of scale and distribution system, Pepsi’s snack division is a major reason why Coke’s margins are exceedingly higher. The sight surely pleases Buffett.

Buffett’s recommendation

Above are only a few reasons why Coke is a Buffett favorite. It is an efficiently managed, mature firm that continues to generate investor value through dividend payments and market growth. Additionally, Coke’s margins are untouchable by its competitors, and it is an entrenched giant in a global industry. With large stake in Coke, Berkshire Hathaway Inc. (NYSE:BRK.A) and Buffett will continue to reap benefits. In my opinion, Coke is in business for the long haul.


Brendan Marasco has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo.
Brendan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why Buffett Likes Coke … and Not Just the Drink originally appeared on Fool.com is written by Brendan Marasco.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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