Coca-Cola continues to be a stellar investment for Warren Buffett. Should I buy it?

Oliver Rodzianko examines one of Warren Buffett’s longest holdings, Coca-Cola. Can the long-term future of it be as bright as the past?

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Some of the great companies that were instrumental in making Warren Buffett mega-rich include Apple, Bank of America, Coca-Cola (NYSE:KO), and American Express. I think all of these continue to show promise, but one stands out particularly to me.

Coca-Cola has been part of Buffett’s company, Berkshire Hathaway, since 1988. The company also pays a generous dividend, and the master investor’s annual dividend income from just this one holding alone is over $700m.

Why Buffett chose Coke

The organisation has some compelling elements to it. I can see why it’s been a popular choice among many investors. First of all, its brand strength is incredibly strong. As its products are desired all over the world, it can command higher prices for its very simple beverages.

I think Buffett also knows the importance of cultural significance, not only in driving profits within a business but also in pushing investment returns. Some of the world’s most famous companies trade at unusually high valuations, and Coca-Cola is no exception. That can make an investment very prosperous if bought early on in an organisation’s life.

My thoughts on the shares today

Based on the above points, it’s no surprise that the company has one of the highest net income margins in the non-alcoholic beverages industry. It’s hard not to see the opportunity there.

And while the company may not be growing as fast as it once did, it still commanded an impressive 11.5% revenue growth rate annually for the past three years.

But while the financials are obviously quite compelling, that’s not what I like the most about Coca-Cola right now. The company is doubling down on adapting to health trends. It’s been reducing sugar in its drinks. I know that many of them still can’t be considered healthy, but it’s a step in the right direction.

Long-term risks

Now, while its initiatives show some promise, I have to be honest. If health trends continue and societies around the world continue to consume less sugar, I wonder whether Coca-Cola will always have a place. If it changes its products too much, it would be unrecognisable to what Buffett initially invested in.

Also, governments around the world are beginning to impose higher taxes on sugary drinks. This could be instrumental in reducing the company’s growth and eventually lead to a decline. So, if I became a shareholder, I’d need to watch consumer and policy trends carefully over the long term. It could arguably go either way.

It looks stable for now

My proposed risks for the firm are very long-term, but in the next decade, I can’t realistically see Coca-Cola fading into the background. Analysts expect growth to be good too. Over the next three years, the consensus is that its earnings will increase at a compound annual growth rate of nearly 7%.

Coca-Cola isn’t quite the right investment for me. I don’t drink any of its beverages, and I think it’s important to have a taste for the products or services I invest in.

Buffett, on the other hand, says that he drinks about five 12-ounce servings of Coca-Cola products per day. Maybe he should keep on holding on to his shares. It’s clearly a lifelong love story.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Oliver Rodzianko has positions in Apple. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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