Recently, Buffett’s annual letter to shareholders was released, causing heated discussions in the market. What impressed me most was that Buffett described his investment “secret weapon” through the cases of Coca-Cola and American Express: dividend + time, that is, long-term sustainable dividends.
Coca-Cola is one of Buffett’s most classic investment cases that investors are familiar with. In the past, more discussions were made about Coca-Cola’s brand, excellent business model, and the amazing returns brought by long-term holdings. Take a look at this investment.
Dividends are an important source of stock income
If a friend who has never bought stocks asks how you make money buying stocks, how would you answer?
I think many people will say that it is natural to look at the stock price. If the stock price rises, it means that you have made money.
This argument, right? I think it’s true, but not entirely true.
Because there are actually two parts to the source of stock income, one is the income from rising stock prices, and the other is the income from corporate cash dividends. Expressed in a formula, stock income = stock price rise and fall + dividend income.
In the mature U.S. capital market, dividends (dividends) are an indicator that investors value very much, and corporate dividends have long been a practice of rewarding investors.
Some outstanding U.S. listed companies have insisted on paying dividends every quarter for a long time, and even borrowed debts to repurchase stocks and distribute dividends. For example, since the first cash dividend distribution in 1904, the DuPont Company of the United States has continuously distributed quarterly cash dividends for more than 100 years. Dividends have become one of the most stable incomes for investors.
Because A-shares have been established for a relatively short period of time and the relevant laws and regulations are not perfect, the stock market is regarded by many business owners as a place to collect money, and few companies are willing to pay dividends to investors. Therefore, many domestic investors have ignored the income of dividends.
With the continuous promulgation of A-share policies and regulations related to corporate dividends, more and more excellent companies have begun to continue to distribute dividends to investors, such as Kweichow Moutai, Gree Electric, China Shenhua, Yili and other companies. Has a long-term record of stable dividends.
Coca-Cola investment case review
The global stock market crash broke out in October 1987, and all of a sudden, many high-quality stocks fell sharply. The stock price of Coca-Cola, which Buffett has long been concerned about, also fell sharply. It fell from a high of around $53 to $29 before rebounding.
Buffett started buying Coca-Cola at the end of 1988. He bought 14.17 million shares at a price of $42 that year, with a static price-earnings ratio of about 17.2 times. In 1989, he bought 9.18 million shares at a price of US$47, with a static price-earnings ratio of about 16.5 times.
A few years later, in 1994, an additional 6.6 million shares were added, rounding up the total number of shares held to 100 million shares. So far, Buffett has invested a total of $1.3 billion in Coca-Cola.
The investment case of Coca-Cola was at the peak of Buffett’s investment. At this time, Buffett had already got rid of the psychological barrier of cigarette butt stock investment, and he was able to use the investment strategy of buying high-quality companies at a reasonable price and focusing on the company’s future free cash creation ability.
In the 10 years since Buffett bought it for the first time in 1988, the stock price of Coca-Cola exploded. By the middle of 1998, the stock price had doubled by 13 times, and the price-earnings ratio had reached a historical high of 50 times. This period is also the 10-year 10-fold stock god highlight moment that is most talked about by the market.
If Buffett chooses to sell at this time, the profit will be 13 times in 10 years, which will be a very remarkable investment. However, the actual situation is that Buffett at that time insisted that Coca-Cola was not for sale, and did not choose to sell it, but chose to accompany the company to continue.
However, the market ruthlessly educated Buffett. Coca-Cola’s stock price fell all the way after peaking in 1998. At most, the stock price fell by 50%. It was not until 15 years later in 2013 that Coca-Cola ushered in a rise again.
Buffett later admitted on multiple occasions that it was a mistake not to sell Coca-Cola when its valuation was high in 1998. At the 2006 shareholders meeting, Lao Ba reflected, “What was I thinking at the time, I also felt very strange”, “You can blame me, because I didn’t sell it at a price-earnings ratio of 50 times.” Since then,
Buffett No single stock was ever mentioned as not for sale, not even Apple.
Revisiting the Dividend Angle
In the latest Buffett letter to shareholders in 2023, Buffett described one of his secrets to long-term ultra-high yields in a chapter titled “Secret Recipe” (“Secret Weapon”): long-term sustainable dividends, and listed The cases of Coca-Cola and American Express are illustrated.
Buffett disclosed that he completed his seven-year purchase plan for Coca-Cola in 1994. He currently holds a total of 400 million shares at a total cost of US$1.3 billion. In 1994, he received a dividend of 75 million yuan. By 2022, the dividend has increased to US$704 million.
There are two information points here, if you simply follow the literal meaning, it is easy to be misunderstood. I have seen that many media reports have mistranslated.
In the shareholder letter, Buffett mentioned that Berkshire bought a total of 400 million shares of Coca-Cola. In fact, the 400 million shares were not the number Buffett bought at the beginning, but the number he currently owns after multiple stock splits, which is A Shares are often referred to as bonus shares.
Buffett bought Coca-Cola for the first time in 1988, buying a total of 14.17 million shares. Four years later, in 1992, Buffett held a total of 93.4 million shares through multiple purchases (during which there were two 2:1 stock splits) , and the last purchase was in August 1994, and only 6.6 million shares were bought, rounding up to an integer of 100 million shares.
For nearly 30 years since then, Buffett has neither bought nor sold, but Coca-Cola conducted another 2:1 stock split in 1996 and 2012. Buffett’s 100 million shares first became 200 million shares, and then became the 400 million shares he currently holds.
Also, note that the 2022 dividend stated in the shareholder letter has grown to $704 million, which is the $704 million dividend received from Coca-Cola for all of 2022. I have seen a lot of mistranslations in the media that since 1994 to date a total of $704 million in dividends has been received.
For this reason, I checked the information and verified that Coca-Cola will pay dividends 4 times in 2022 (many companies in the US stock market will pay dividends once a quarter), with a total dividend of US$1.76 per share. At present, Coca-Cola’s total share capital is 4.327 billion shares, which means that the total dividend cost is 1.76 ×43.27=about 7.616 billion US dollars. And Berkshire holds 400 million shares, and can get 4×176=704 million US dollars in 2022.
This is exactly in line with the figures Buffett said in his shareholder letter, that is, Berkshire will receive $704 million in dividends from Coca-Cola in 2022. It also means that the dividend income received in one year in 2022 will reach 50% of the overall purchase cost of US$1.3 billion that year. This is the amazing dividend compound interest brought by time.
As time goes by, the absolute amount of dividends has an increasing impact on investment returns, and the impact of stock price rises and falls is no longer a decisive factor.