Is Warren Buffett Right about Coca-Cola?

I ask is Warren Buffett right about Coca-Cola (NYSE: KO) because Berkshire Hathaway (NYSE: BRK.B) owns 9.4% of the iconic soft drink brand.

However, Buffett admits losing $21 million in retained earnings from his Coke stoke in his latest Berkshire Hathaway Shareholder Letter. Hence, I have to ask why does Berkshire Hathaway (NYSE: BRK.A) own so much Coke stock?

After all, Coke is very different from Berkshire’s other big holdings. To explain, Berkshire’s five biggest holdings are American Express (NYSE: AXP), Apple (NASDAQ: AAPL), Bank of America (NYSE: BAC), Coca-Cola, and Wells Fargo (NYSE: WFC).

Why does Buffett Own Coca-Cola stock?

Coca-Cola stands out from this pack because it has far less revenue and cash than the others. For instance, Coke records revenues of $7.058 billion for 4th Quarter 2018. Apple reports revenues of $84.31 billion for 4th Quarter 2018.

In addition, Wells Fargo reports of $28.459 billion for 4th Quarter 2018, Bank of America records revenues of $22.736 billion for 4th Quarter 2018. However, American Express or Amex reports revenues of $9.28 billion for 4th Quarter 2018.

Thus, Coca-Cola’s revenues are not that great when compared to Berkshire’s other holdings. Moreover, Coca-Cola does not have that much cash.

Coca-Cola does not have that much cash

Buffett could be excused for owning Coke if it had a lot of cash. However, Coke’s cash is limited when compared to his favorites.

For instance, Amex had $27.445 billion in cash and equivalents on December 31, 2018. Meanwhile, Apple had $86.427 billion in cash and short-term investments on the same day. Moreover, Wells Fargo had $173.287 billion in cash and short-term investments and Bank of America had $446.828 billion on New Year’s Eve 2018.

In contrast, Coca-Cola reported $10.951 billion in cash and equivalents and $5.013 billion in short-term investments for the same period. Hence, Coca-Cola had $15.954 billion in the bank which is good for a consumer products company. However, that’s bad for a Buffett favorite.

Is Warren Buffett right about Coca-Cola making money?

Nor is Coke’s cash flow that great. Coca-Cola had an operating cash flow of $1.84 billion, an investing cash flow of $2.111 billion, and a free cash flow of $1.56 billion for 4th Quarter 2018.

Meanwhile, Apple reports an operating cash flow of $26.69 billion, an investing cash flow of $5.844 billion, and a free cash flow of $23.335 billion for 4th Quarter 2018. However, American Express reports a negative operating cash flow of -$1.252 billion, a negative investing cash flow of -$5.444 billion, a financing cash flow of $3.24 billion, and a negative free cash flow of -$1.691 billion at the end of 2018.

So Coca-Cola is making money but not accumulating that much cash. Hence, it is hard to see what Buffett sees in this stock beyond sentiment. Buffett famously has a soft spot for Coke which is reportedly his favorite drink.

Is Coca-Cola a Good Dividend Stock?

Consequently, many people will wonder if Uncle Warren owns Coca-Cola because it is a good dividend stock. Notably, Buffett claims he made $624 million off Coke dividends in 2018 in his Berkshire Shareholder letter.

Conversely, I consider Coca-Cola an okay dividend stock because its shareholders will receive a 40₵ payout on April 1, 2019. However, that dividend marks just a 1₵ increase from the 39₵ paid on December 14, 2018.

In contrast, Apple paid a 73₵ dividend on 14 February 2019, but Amex paid a 39₵ dividend on March 11, 2019. Thus, Coca-Cola is a slightly better dividend stock than American Express. However, I consider Apple a better dividend stock than either.

Strangely, the most reliable thing about the Coca-Cola dividend is its reliability. Dividend.com claims Coke shareholders have enjoyed dividend growth for 56 years. In addition, Coke offered shareholders a dividend yield of 3.35%, an annualized payout of $1.56, and a payout ratio of 75.4% on March 28, 2019.

Why Coca-Cola Stock is overpriced

Thus, Coca-Cola is a historically reliable dividend stock. However, I think Mr. Market overpriced it at $46.66 a share on 28 March 2019.

I think Coca-Cola stock is overpriced because of the threats to business. In fact, I believe Coke is headed for a fall in the near future because of these threats.

Coke; like other heritage consumer brands, faces a difficult consumer market that is getting more complex and hazardous. Specifically, changes in retail and the political and cultural climates are creating threats that can destroy Coca-Cola.

The Greatest Threats to Coca-Cola

The first; and most theoretical, threat to Coca-Cola is health concerns. In particular, health crusaders like Dr. Robert Listig believe sugar is a deadly threat to our health.

Like the anti-tobacco crusaders the sugar warriors have had some successes taxing soda pop and getting limitations on soda sizes. In fact, there is evidence soda taxes work, NPR reports. Thus, cash-strapped local and state governments will take notice of the extra revenue.

A second; greater threat, to Coke is the combination of retail consolidation and private label brands. To explain, giant grocers like Walmart (NYSE: WMT) and Kroger (NYSE: KR) control most of America’s supermarket shelves. The situation overseas is similar with companies like Tesco in the United Kingdom, Aldi in Germany, and Carrefour in France.

Under these conditions, grocers; and increasingly discounters like Target (NYSE: TGT), Dollar General (NYSE: DG) and Aldi , have the leverage to fill the shelves with private label brands. In fact, Kroger, Aldi’s, and Target’s business models are based on private labels.

For instance, Aldi or Kroger can sell a liter of private label soda for $1 or $2 as a loss-leader. Meanwhile, Coca-Cola has to sell for $3 or $4 a bottle or lower its price to match the private label and forgo profits.

Yes Amazon is a Threat to Coca-Cola

Consequently, the retailer absorbs part of Coke’s market and profits. To make things worse another aggressive discounter, Amazon (NASDAQ: AMZN) is making a big push into the grocery business.

Amazon is opening automated convenience stores in some cities, offering grocery delivery, and considering buying more supermarkets. If Amazon remains true to form it will stock those shelves and delivery orders with private label brands.

Hence, Amazon Cola could soon be one of Coca-Cola’s biggest competitors in North America. Under those circumstances, Amazon soda could become America’s favorite because they will deliver it to your doorstep.

The Incredibly, Shrinking Coca-Cola

Fortunately, Coke has other markets like convenience stores, fast-food, vending machines, and developing nations it can tap. However, Stockrow reports Coca-Cola’s revenue growth has shrank for at least nine straight quarters. For instance, Coke’s revenue growth fell by 6.85% in 4th Quarter 2018.

Hence, Coke’s market is shrinking and the company is unable to counter losses. Obviously, this explains, desperate moves at Coca-Cola like researching cannabis drinks. Fortunately, Coke CEO James Quincey killed that stupidity, CNN reports.

However, I think Coca-Cola (NYSE: KO) looks like a desperate company in a shrinking market that does not belong in a value portfolio. I conclude Berkshire Hathaway will sell its KO position sooner or later. Therefore, value investors should stay away from Coca-Cola.