Warren Buffett's investment in Coca-Cola (KO) is really fascinating.
He started buying it in 1988 after the 1987 Stock Market crash.
Buffett built his position in Coca-Cola by the end of 1994, and his average cost is $3.25/share.
The stock sold for a P/E of 12 - 15 in 1988.
However, it grew EPS from $0.153 in 1987 to $0.495 in 1994 (adj for splits). Then it grew again to $0.82/share in 1997, before hitting a short-term snag.
You can view the trends in earnings per share, share price and dividends between 1984 and 2003
In the meantime, the company's "quality" was re-descovered and investors bid it up to much higher P/E ratios.
In hindsight, one could argue that Warren Buffett should have sold out of Coca-Cola in 1997 - 1998, when it sold at a P/E above 30.
The problem with this thinking is that it wreaks of hindsight bias. It's easy to see the top, and apply "criteria" after the fact when you have perfect hindsight.
The reality of making such rash decisions in real-time is much more complicated. For example, Coca-Cola stock was equally overvalued in 1991, selling above 30 times earnings as well. If you had sold back then at a high price of $10.22/share, you would have missed out on all the upside from 1991 to 1998, when it reached over $44/share. And not including dividends even. Valuation based timing only works perfectly with the benefit of hindsight, but rarely in real time.
Of course, selling would have also triggered steep corporate taxes of 35% or so. So if they sold at close to the all-time-highs at $43.25/share in 1998, they'd have realized a gain of $40/share. The IRS would have taken away $14/share in taxes. Of course, it is impossible to sell at the very top. It is also impossible to just sell 400 Million shares just like that, which represents a very high percentage ownership of the float. This sale by Buffett would have depressed the share price, so they would have had to sell at a lower price, even if they knew where the top and bottom would be (which is impossible) on top of losing a steep amount of value in taxes on capital gains.
As a corporation, Berkshire Hathaway does not get a preferential tax rate on realized capital gains. They do get a preferential tax rate on dividends, due to the dividends received deduction.
Today, Coca-Cola's growth has slowed down, as the company is expected to earn $2.97/share. But it's not out yet.
The company pays an annual dividend of $2.04/share, which represents an yield on cost of 62.76% for Berkshire. This means that every 18 months, Buffett's holding company gets its original cost back in dividends alone. Dividends are a return on investment and a return of investment.
Plus, at $69.48/share, Buffett is sitting at a nice unrealized gain of $666.23 per share (reminder his cost is $3.25/share)
The nice thing is that since 1994, he has received $29.27 in dividends per each share he owns.
Today, this investment is worth almost $28 Billion and generates $816 million in annual dividends.
That dividend money has been deployed by Buffett into the best opportunities he could find, at the ROI he requires.
