Warren Buffett's Berkshire Hathaway Bought This Dividend Stock for a Reason. Here's Why Greg Abel Won't Sell.

Since taking over as CEO of Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) at the start of this year, Greg Abel hasn't wasted much time. In less than nine months, Warren Buffett's successor has made quite a few major investments, including increasing Berkshire's position in Alphabet by $17 billion, as well as acquiring homebuilder Taylor Morrison for $8.5 billion.

Abel has removed numerous stocks from the Berkshire equity portfolio, most notably Mastercard, Visa, and UnitedHealth Group. Yet while Abel hasn't shied away from reshaping Berkshire's stock portfolio, there is one particular name among the well-known Warren Buffett investments that he'll likely not touch: Coca-Cola (NYSE: KO).

Berkshire's 9.3% stake in Coca-Cola, a $35.5 billion position that accounts for nearly 10% of Berkshire's overall stock portfolio, is one of the stocks most associated with the "Oracle of Omaha." Abel will likely continue to hold this position as is. Not out of sentiment, but out of cold, hard economics.

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Why Coca-Cola became a bedrock position for Berkshire

Berkshire Hathaway first invested in Coca-Cola in 1988, steadily building up its position until 1994. Warren Buffett's holding company paid a total of $1.3 billion for the position. The position is now worth over 27 times its cost basis. Based on Coca-Cola's forward yield of around 2.4%, Berkshire generates around $850 million in annual dividend income. That's a yield-on-cost of over 65%.

In short, steady earnings and dividend growth led to consistent compounding for the Coca-Cola investment, making it a bedrock position in the Berkshire Hathaway portfolio. But why did Buffett buy it in the first place? Back in 1988, Buffett was motivated to buy Coca-Cola, despite Wall Street's concerns about it peaking in price, on the view that the company, with its strong cash flow, steady shareholder equity growth, and deep economic moat surrounding its beverage brands, made it a more-than-reasonably priced buy compared to its intrinsic value.

Time has arguably proven Buffett's thesis correct. Yet while the stock is no longer a value play today, there's a reason why Berkshire never sold it under Buffett's leadership, and likely won't under the leadership of Greg Abel.

The high cost of taking profit

Coca-Cola shares have surged by over 27% year-to-date. Following this latest rally, the stock now trades for 26 times forward earnings. That's pricey, even when compared to other blue chip consumer staples stocks.

However, just because Coca-Cola now trades at premium prices, don't expect Abel to rush to take profit. With a cost basis of just $1.3 billion, Berkshire would owe around $7.2 billion in federal corporate income taxes on the gain. With the $28.3 billion in after-tax proceeds, Abel would need to find an investment capable of generating returns superior to what Berkshire generates from its $35.5 billion stock position.

On the flip side, holding onto the position, it can continue to generate dividend income, funds that can be put into new investments. Portfolio income from the position will likely continue to grow, given the long track record of annual payout increases for this stock, one of the Dividend Kings. This leaves Abel better-equipped to make his mark elsewhere.

Thomas Niel has positions in UnitedHealth Group. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.