With Buffett Recently Stepping Back as Chairman, Here's a Look Back at the $1.3 Billion Bet That’s Now Worth $34.7 Billion

Warren Buffett recently stepped down as chairman of Berkshire Hathaway (NYSE:BRKB)(NYSE:BRKA). His son, Howard Buffett, is assuming the role, and he's becoming the chairman emeritus. Buffett previously stepped down as CEO earlier this year, and Greg Abel assumed that role.

With Buffett stepping back from Berkshire, I wanted to revisit one of his best investments: Coca-Cola (NYSE:KO). Buffett started buying the beverage stock in 1988 and has never sold a single share. That investment has paid big dividends over the years.

Image source: The Motley Fool.

Buffett's satisfying Coca-Cola investment

Warren Buffett started building a position in Coca-Cola in 1988. By the early 1990s, he'd accumulated about $1.3 billion in Coca-Cola stock. Berkshire hasn't sold a single share of Coca-Cola and now has 400 million shares. That's 9.3% of Coca-Cola's shares outstanding. This position is currently worth $34.7 billion, a more than 2,500% return. That's Berkshire Hathaway's third-largest investment holding, accounting for 10% of its portfolio.

Berkshire's Coca-Cola return doesn't include dividends, which it has increased every single year since Buffett bought shares. It has now increased its dividend for 64 straight years, more than enough to qualify it as a Dividend King (a company with 50 or more years of annual dividend increases). The beverage company currently pays $0.53 per share each quarter ($2.12 annualized), up 4% from its prior-year payout. Coca-Cola paid shareholders $8.8 billion in dividends last year and more than $100 billion since 2010.

With 400 million shares, Berkshire Hathaway is receiving $212 million in dividends each quarter and $848 million each year. That's an eye-popping 65% yield on Berkshire Hathaway's original cost basis of $1.3 billion. Talk about a high-yielding investment!

Lessons from the Oracle of Omaha

Buffett's Coca-Cola investment can teach investors some valuable lessons. One essential lesson is the power of compounding. Coca-Cola is one of Buffett's "forever" stocks, a company with a wide economic moat that should compound shareholder value for decades. Buffett has pointed out Coca-Cola's unmatched global brand and unstoppable dividend growth as the key characteristics making it a forever holding.

While Buffett has sold plenty of stocks over the years, he has left his compounding machines alone. That has enabled Berkshire to benefit from the steady earnings and dividend growth these companies have delivered over multiple decades. Buffett's former business partner, Charlie Munger, stated, "The first rule of compounding: Never interrupt it unnecessarily." Berkshire's Coca-Cola investment showcases the long-term value of holding on to a compounding machine.

The power of dividend growth is another key learning from this holding. Many investors get caught up in a company's current yield. However, the historical return data on dividend stocks shows that their true power lies in growth, not yield. Since 1973, S&P 500 companies that pay a growing dividend have delivered an average annual total return of 10.2%, according to data from Ned Davis Research and Hartford Funds. That's significantly higher than companies that don't grow their dividends (6.9% for those with no change and -0.1% for dividend cutters and eliminators) and those that don't pay dividends (4.2%). Buying and holding companies that can deliver decades of durable dividend growth is a proven wealth compounding strategy.

Is Coca-Cola still a forever stock?

Coca-Cola has been a fantastic investment over the years. However, it's important to look at Coca-Cola with fresh eyes today, rather than assume it's still the "forever" holding Buffett bought a few decades ago.

Coca-Cola currently expects to deliver about 5% organic revenue growth this year and 7%-8% comparable currency-neutral earnings per share (EPS) growth. It also expects to generate $12.4 billion of free cash flow. That aligns with its stated long-term growth algorithm of 4% to 6% organic revenue growth and 7% to 9% comparable currency-neutral EPS growth. Meanwhile, free cash flow more than covers the dividend (currently $9.1 billion annualized). With Coca-Cola's dividend yielding around 2.5%, and its earnings growing by 7%+ each year, the company can deliver around 10% annual total operational returns from here (dividend income plus earnings growth). That's a rock-solid compounder.

Be like Buffett

Warren Buffett has been a wonderful investment teacher over the years with both his words and actions. His Coca-Cola investment shows the power of buying and holding a dividend growth compounding machine. This investment has delivered significant price appreciation over the years as Coca-Cola has grown its earnings and dividend, which is providing Berkshire with more income each year. Given its current financial performance and long-term growth ambitions, it remains a great stock to buy and hold forever.

Matt DiLallo has positions in Berkshire Hathaway and Coca-Cola. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.