Investors often look for ways to make their stock portfolios more immune to recessions. To do that, they might study the investment philosophy of Warren Buffett.
While Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) recession strategy may focus on the company's approximately $348 billion in liquidity, Buffett's company continues to hold an extensive portfolio of stocks, and that part of the strategy could revolve heavily around stocks like Coca-Cola (NYSE: KO).
Still, Buffett and his team first began buying shares of Coca-Cola in 1988, and Berkshire has not bought additional Coca-Cola shares since 1994. Knowing that, is owning a Warren Buffett investment like Coca-Cola an appropriate way to recession-proof one's portfolio? Let's take a closer look.
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Berkshire Hathaway and Coca-Cola
Admittedly, one might feel tempted to follow Berkshire's lead with this stock. Buffett's company invested just under $1.3 billion over six years. In that time, subsequent stock splits took Berkshire's Coca-Cola position to 400 million shares, valued at about $28.8 billion as of this writing.
Moreover, that does not include dividend income earned over that time. That dividend has increased for 63 consecutive years, making the company a Dividend King. Those increases have taken the payout to $2.04 per share.
The rising dividend over 37 years means Berkshire's Coca-Cola shares will earn $816 million in dividends this year. That takes Berkshire's annual dividend yield to around 63%, likely making it recession proof in Buffett's case.
Coca-Cola may also appear attractive in recessionary environments. Beverages, particularly water, are necessary for survival. A Coca-Cola soft drink or Topo Chico hard seltzer may appeal to consumers who cannot afford a more expensive luxury during a recession.
Coca-Cola and new investors
Unfortunately for those looking to buy now, the investment case for Coca-Cola may give investors clues as to why Berkshire has not bought additional shares in 31 years.
For one, at current prices, the dividend yield is about 2.75% for new investors. That is around double the 1.35% average return on dividends for companies in the S&P 500 index. Nonetheless, investors will have to rely primarily on stock price gains if they want to outperform that index.
Indeed, its growth is not on track to end anytime soon. Coca-Cola owns more than 200 beverage brands, and even though its flagship brand has achieved global saturation, the company can still increase consumption of its products.
However, such conditions do not guarantee stock price gains. In 2022, Coca-Cola stock peaked and entered correction territory, and it took two years to return to its all-time high. Though the stock rose 15% over the last year and 61% over the previous five years, a recession interrupted that growth.
Additionally, its P/E ratio is 29, which is slightly above its five-year average earnings multiple of 27. With analysts forecasting 3% earnings growth this year and 8% in 2026, the stock appears pricey at current levels. That could make it vulnerable in a recession, at least in the near term.
Should I buy Coca-Cola to recession-proof my portfolio?
In the current environment, one should probably not follow Buffett's team into Coca-Cola stock to recession-proof one's portfolio.
Coca-Cola is a recession-resistant stock on the surface, as consumers are likely to buy its beverages regardless of the state of the economy.
However, Berkshire Hathaway has telegraphed that Coca-Cola is a hold rather than a buy. Coca-Cola has raised its dividend for 63 straight years, and it makes little sense to walk away from a dividend yield that is at 63% and rising. Still, the fact that Berkshire has not reinvested the dividend income in Coca-Cola stock is telling.
Moreover, a 29 P/E ratio is not cheap for a stock growing profits at single-digit percentage levels. That makes it more vulnerable to a sell-off if stock market conditions deteriorate.
Making one's stock portfolio resistant to recessions is a desired goal, particularly for shareholders unwilling or unable to take on significant risk. Nonetheless, Berkshire's investment history with Coca-Cola shows it may not deliver the protection from downturns that some investors seek.
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Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
