Warren Buffett is currently earning a 39%
It seems impossible. If you or I were to buy the shares today, we'd
of just 1.3%.
But Buffett first added the shares to
Berkshire Hathaway's (NYSE:
portfolio back in 1988. Despite being a mature business even back
then, the stock has earned roughly 1,800% on Berkshire's original
investment. Meanwhile, Berkshire's
yield on cost
(the amount of dividends earned as a percentage of the original
investment) is 39% per year thanks to Coke's steady
What's behind this? After all, Coke had been around for more
than a century before Buffett invested. How is it that some
companies can continue to grow -- and raise dividends -- seemingly
It's an advantage that I
The few businesses that have this advantage are among the richest
companies in the world. And they only seem to get richer with every
passing year -- much to the enjoyment of their investors.
Many companies have operated with this advantage for decades,
without a peep from the government.
That's because this isn't a monopoly in the traditional sense. Most
monopolies attract attention (and regulation) because they keep
other businesses from competing. They tilt the odds so far in favor
of one company that no one else can even do business.
But the legal monopoly I'm talking about doesn't keep other
businesses from competing -- it simply helps a company to continue
growing and generating billions in profits for its investors...
almost no matter what.
Take a look at what Coke has done during the past decade. And
remember, the company was founded in the 1880s. The results below
come after more than a century in business.
So what is the legal advantage that allows some companies --
like Coca-Cola -- to essentially grow forever, raise dividends and
return hundreds of percent for their investors?
It's the strength of their distribution networks.
If you don't get excited about distribution networks, I don't blame
you. At first glance, they seem boring and technical. But they
couldn't be more important.
Distribution networks are key to getting a product in front of
consumers. It's the network that gets a product from production to
a store's shelves.
Coca-Cola has one of the largest and most efficient distribution
networks on the planet. The company's products are sold in over 200
countries and it has over 270 distribution centers located around
the globe. That's how it is able to sell 1.7 billion beverage
servings every day, all over the world.
By comparison, RC Cola, one of Coca-Cola's biggest competing brands
is only sold in 45 countries... and the soft drink's producer --
Dr Pepper Snapple Group (NYSE:
-- only has distribution centers in the United States, Canada and
certain parts of Latin America.
Thanks to the immense size its distribution network, Coca-Cola
continues to grow year after year. That's because it can
its distribution network to boost sales for new products,
Take the case of Coca-Cola's Zero. The product was introduced in
2005, and within four years, sales of Coke Zero were already
topping $1 billion per year.
On the other hand,
Jones Soda (NASDAQ:
-- another popular American soft-drink company -- has been around
for almost three decades... but due to the company's limited
distribution channel, Jones Soda's revenue barely broke $17 million
For a smaller company like Jones, achieving $1 billion in sales is
seemingly impossible due its limited distribution network.
In fact, companies with dominant networks like Coke don't even
have to create their own products. Often, they can simply buy
another company and add the product to their own distribution
network, creating billions of dollars in value in the process.
That's how Coca-Cola has developed 15 brands that generate sales
of more than $1 billion annually... and it continues to add more.
With all of this in mind, it's little surprise Coca-Cola has
increased its annual revenue every year since 2001. Meanwhile, its
dividends have increased every year since 1962.
But as much as I admire what Coca-Cola has done with its massive
scale and dominant distribution network... and the billions it
returns to investors... I don't think you should rush out and buy
the stock right now.
The stock is expensive. Right now it's trading at a
ratio of 21.4... over five points higher than the S&P historic
average of 15.5. With such a rich valuation, it would be wise to
wait before jumping into this stock.
Action to Take -->
But the good news is Coca-Cola is by no means the only stock like
it. In my August issue of
Top 10 Stocks
, I profiled a company with a distribution channel that rivals
Coca-Cola's... is trading at a cheaper valuation... and has a
history of making its investors wealthy. To get the name of this
to become a
Top 10 Stocks
subscriber. (If my newsletter isn't for you, you can always cancel
your subscription within the first 30 days for a full
... no questions asked.)
-- Paul Tracy
Paul Tracy does not personally hold positions in any securities
mentioned in this article. StreetAuthority LLC owns shares of
BRK-B, KO in one or more if its "real money" portfolios.
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