Why Does Warren Buffett Love Coca-Cola Stock? He Gave a Very Clear Answer Which Every Investor Should Understand.

Is Coca-Cola (NYSE: KO) Warren Buffett's favorite stock? It might be, and it's at least one of his favorites. He has praised it many times for a number of its features, and he's used it on several occasions to demonstrate what he thinks constitutes a great business.

Most Buffett fans know that he has said that his favorite holding period is forever. But did you know that when he said that, he was talking about Coca-Cola stock? He's held true to that view, repeating several times that he would never sell Coca-Cola stock.

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He provided a clear and detailed explanation of what's so great about Coca-Cola at last month's annual shareholders' meeting, and every investor who wants to be successful should pay close attention to what he said.

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A stock to hold forever

Berkshire Hathaway bought shares of Coca-Cola stock for the first time in 1988, making it his longest-held stock. In that year's shareholders' letter, Buffett wrote his famous quote: "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

Buffett has called himself a "business-picker," not a "stock-picker." He tells investors to avoid short-term dips and gains and to focus on what makes a great business because a great business can withstand the test of time and will ultimately reward investors. As a Dividend King that's raised its dividend for 63 years consecutively through all kinds of conditions, Coca-Cola has certainly proven itself.

A business that can last forever

This year, Buffett gave a long commentary on how Coca-Cola's model makes it such a fabulous business:

It's always better to make a lot of money without putting up anything than it is to make a lot of
money by putting up a lot of money. And so a business that takes no capital to speak of, Coca-Cola, the finished product, which has gone through bottling companies and everything, that takes a lot of capital. But in terms of selling the syrup or the concentrate that goes to it, it doesn't take a lot of capital. So one is a fabulous business and one is a -- it depends where it is and everything like that. Coca-Cola is popular every place. But some places -- I mean, if you're in the bottling business, it costs real money. You have real trucks out there and you have all kinds of machinery and you have capital expenditures coming up. And we've got businesses that take very little capital that make really high returns on capital.

Investors often think of Buffett as a value investor, but he's really the ultimate contrarian investor. If you take a look at the Berkshire Hathaway portfolio, it owns few so-called hot stocks and many stocks investors never talk about, such as Moody's and Chubb. These are cash-strong businesses with products that are always in demand, companies that are well-established and stable, and companies that don't need to put in a lot money to make a lot of money.

Buffett talks about these qualities far more often than telling investors to get a good deal, recommending them to buy great companies at fair prices instead of vice versa.

What's a great business?

When explaining what makes a great business, Buffett has often focused on a company's return on capital. Being able to make a lot of money without having to invest a lot of money creates high profits and generates a robust, cash-generating business cycle.

For Coca-Cola, that's tied into its brand name, which is such an important part of its moat, or competitive advantage. Coca-Cola is not in the bottling business; it makes syrups and concentrates that it sells to its bottling partners, a much less capital-intensive business. The bottling partners add water and other components to create the finished product.

Most of its end-user products are made locally through this system. It sells its concentrates to local business partners who make the final products on-site and know people love Coke's beverages. Some final products are the cans and bottles sold in supermarkets and the like, and some final products are sold as drinks in dining establishments. The company has more than 200 bottling partners and calls this network the Coca-Cola system.

Even more important today

CEO James Quincey has noted that because of the company's local production, Coke has less exposure to the tariff situation. The tariff program keeps changing, creating volatility for U.S. companies that rely on imports. But Coca-Cola has a concentrate facility in the U.S., and because it's such a large company with many parts -- it has 950 production facilities worldwide -- it has leverage with suppliers and the ability to change things to its benefit.

This is the kind of resilience that Buffett prizes, and it comes from being agile instead of bogged down with capital-heavy assets. This is what Buffett means when he talks about great businesses, and these are the kinds of businesses that can last and create long-term shareholder value.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Moody's. The Motley Fool has a disclosure policy.