Coca-Cola Faces Short-Term Challenges While Berkshire Hathaway Stays Strong

Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has invested in Coca-Cola (NYSE: KO) for many years. Coke remains one of Buffett’s top investments, increasing significantly in value and providing steady passive income. However, Coke’s stock has dropped over 12% in the past month, taking away most of its gains for the year. Let’s explore the reasons behind this decline and whether it’s still a worthwhile dividend investment.

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Long-term Investments of Berkshire Hathaway

Berkshire Hathaway holds Coca-Cola and American Express (NYSE: AXP) as two of its oldest investments. Together, they account for over 23% of Berkshire’s public equity portfolio. Warren Buffett has frequently highlighted the companies’ abilities to buy back shares and increase dividends during his annual letters to shareholders.

When companies buy back shares, the ownership percentage for existing shareholders rises without needing to buy additional stock. For instance, if a company has 100 shares and buys back 20, the remaining 80 shares mean that anyone holding a share now owns 1.25% instead of 1%.

Furthermore, if the company raises its dividend annually, each share generates more income. This cycle results in more ownership and income over time, rewarding loyal investors in both Coca-Cola and American Express.

Berkshire has acknowledged challenges faced by both companies, including times of overexpansion and management errors. Despite these issues, Coca-Cola and American Express remain strong businesses that can navigate short-term difficulties. In Berkshire’s 2023 letter, Buffett reminded investors, “When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”

Coca-Cola: A Leading Dividend Stock

Coca-Cola is renowned for its ability to generate dependable passive income, boasting 62 consecutive years of dividend increases, which qualifies it as a Dividend King. With a dividend yield of 3.1%, it outshines many other companies that raise their dividends consistently.

The company has a wide range of nonalcoholic beverages, including sodas, teas, coffees, juices, and sports drinks, allowing it to thrive globally. As of September 27, 2024, North America made up 39.3% of Coca-Cola’s revenue and 43.4% of its operating income, although international sales now equal or surpass the North American market.

Coca-Cola benefits from impressive operating margins due to its well-structured supply chain and partnerships with bottlers. By outsourcing parts of its production, Coca-Cola can adapt its product offerings to regional market demands more effectively.

However, Coca-Cola is not without risks. The company reported a decline in unit case volume in the latest quarter. Although they have relied on price increases and popular brands to boost earnings, consumers may resist further price hikes if demand continues to weaken.

Coca-Cola’s global presence helps cushion regional downturns but exposes it to currency exchange risks. As most earnings come from outside the U.S., a strong U.S. dollar can lower these earnings when converted back to dollars.

The ICE U.S. Dollar Index tracks the dollar’s value against other currencies. After flirting with a 52-week low in September, the index surged to a new high, possibly influenced by recent political developments.

Coca-Cola’s recent stock decline is primarily a result of a disappointing earnings report and concerns over potential earnings drops amid reduced demand and a stronger dollar. Despite this, Coca-Cola remains an attractive value even if earnings take a hit.

Currently, Coca-Cola’s price-to-earnings (P/E) ratio is lower than its historical average across various periods.

KO PE Ratio data by YCharts

Though the forward P/E ratio appears low, it should be approached cautiously due to the possibility of revised earnings estimates from analysts given current uncertainties.

It’s possible Coca-Cola’s stock may continue to slide due to various pressures. That said, this could be a prime opportunity to acquire shares at a discount. Importantly, if demand weakens alongside a stronger dollar, it may affect earnings but not derail the overall business. Coca-Cola maintains a solid financial foundation, making it capable of supporting dividend increases even during downturns.

For some investors, it may be smarter to invest directly in Berkshire Hathaway.

Berkshire Hathaway: A Financial Powerhouse

Berkshire Hathaway is known for not paying dividends, with Buffett advocating for reinvesting profits back into the business, expanding into new ventures, or buying back shares. This strategy has proven effective over the long term, generating substantial returns.

Beyond its public stock holdings, Berkshire owns various businesses, including insurance companies, BNSF railroad, Berkshire Hathaway Energy, and other manufacturing and retail entities.

This year, Berkshire has been actively selling stocks. Notable reductions in Apple, Bank of America, and other positions have significantly increased Berkshire’s cash reserves and treasury holdings to $325 billion, surpassing its entire equity portfolio in value.

By investing in Berkshire Hathaway, investors gain access to a diversified assortment of stable businesses. The company’s ample cash reserves can be deployed to purchase undervalued stocks during market downturns or facilitate timely acquisitions.

Making Smart Investment Choices

Investors seeking to enhance their retirement income or create a reliable source of passive income might still find Coca-Cola more appealing than Berkshire Hathaway.

Both Coca-Cola and Berkshire Hathaway present solid investment opportunities currently. Coca-Cola has an excellent history of increasing dividends while being well-positioned to sustain those increases, even in the face of declining earnings. Berkshire, on the other hand, offers a diverse portfolio of secure businesses and significant cash for navigating any challenges ahead.

A balanced investment strategy may involve splitting funds evenly between these blue-chip stocks.

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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.