Do you like bargain stocks? You’re in good company if you do. Legendary stock-picker Warren Buffett likes them too. In fact, the market-beating performance of Buffett-led Berkshire Hathaway is ultimately rooted in the Oracle of Omaha’s value-seeking strategy. That’s why you’d be wise to poach some of his picks for yourself.

With that as the backdrop, here’s a closer look at one of his favorite holdings you can step into right now at a great price: The Coca-Cola Company (KO).

It may not be the company you think it is
Coca-Cola is not a company that needs much of an introduction or explanation. It is, of course, one of the world’s very biggest beverage companies. Aside from its namesake cola, the organization is parent to beverage brands like Gold Peak tea, Minute Maid juices, Powerade sports drinks, and Dasani water, just to name a few. It’s one of the planet’s most recognized brands as well.

That’s not quite the reason Berkshire is holding 400 million shares, or nearly 7%, of the beverage giant, valued at $24 billion — the fund’s fourth-largest stock holding. Rather, Buffett’s affinity for the company is Coca-Cola’s resilient product marketability and reliable dividend. Not only has Coca-Cola paid a quarterly dividend like clockwork for decades now, it’s raised this dividend payment annually for 61 consecutive years.

Investors keeping close tabs on Coca-Cola stock may realize it’s not “cheap” by several standards. Chief among these criteria is its price-to-earnings (P/E) ratio of nearly 23 on this year’s expected per-share earnings of $2.64. No doubt, you can find stocks with lower earnings-based valuations.

The market’s pricing here, though, isn’t earnings-oriented; it’s dividend-minded. That is to say, the stock’s price gives it a slightly above-average dividend yield of 3.1% while reflecting the company’s high net profit-margins of more than 20%. For perspective, the S&P 500‘s average net-profit margins are in the ballpark of 7% to 11%.

What gives? As a consumer, you probably didn’t even notice it. But between 2015 and 2019, The Coca-Cola Company largely got out of the bottling business by selling these facilities and their operations back to localized bottlers. Its goal was to punt this work, including its revenue as well as its ever-changing costs, so the parent company could focus on licensing and royalties.

In retrospect, it was a brilliant decision. Although the measure took away a huge chunk of Coke’s revenue, the licensing and royalty business boasts much higher profit margins in addition to much more reliable profits. That’s particularly been the case of late, with inflation driving operating costs for bottlers through the roof.

This reliable stream of income, of course, supports the company’s dividend payments. Indeed, those are perhaps the top-two reasons Warren Buffett has been a fan and owner of the stock for over a couple of decades now. It offers two of the things he values most: consistent cash flow and reliable dividend income.

Only for long-term investors
Coca-Cola is not a get-rich-quick kind of stock. Berkshire’s position has grown tremendously, but it’s grown very slowly. Dividend payments did a lot of the work and in small, consistent increments. You should expect the same sort of slow, long-term progress if you’re planning on diving in. In fact, you should be viewing an investment in The Coca-Cola Company as at least a five-year holding.

On the flipside, you shouldn’t be deterred by the fact that, at a P/E ratio of more than 20, Coca-Cola shares aren’t exactly “dirt cheap” by most market standards. The shares are cheap by this company’s standards — and you’re not likely to see them priced much cheaper. You are likely, however, to see Coca-Cola shares higher than they are now within a few years.

In other words, slow and steady wins the race. That was certainly the case for Warren Buffett’s position in Coke anyway.

— James Brumley

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Source: The Motley Fool