To Investors,
I’ve been trying to figure out how and why Warren Buffet picks companies to invest in. The top 5 holdings in the Berkshire Hathaway public company investment portfolio are Apple, Bank of America, American Express, Coca Cola, and Chevron. Over a 3-part analysis I’ll share my findings for what makes those companies attractive for Buffet.
This first part will look at Coca Cola and Apple.
What I’ve come to realise with these two companies is that they 1) predominantly serve in the North American region; 2) are at mature stages of the business lifecycle (therefore their operations and numbers are predictable); 3) are the category winners (i.e. the brand that first comes to mind when you think of a category - therefore they have the largest market share/brand awareness); and 4) are efficient at creating shareholder value through capital allocation.
On the first note, Buffet has mentioned that he will always bank on American companies and the American economy. We can look at GDP per capita comparisons to see why.
On the following 3 factors, they each matter because as a minority investor in a company you have no control over the operations and actions of a company, therefore you get your money back, and then some, through capital appreciation and dividends - both made possible by good business management.
Let's look at Apple as the first example…
Apple
According to a report by the International Data Corporation, Apple and Samsung have the largest market share for smartphone shipments globally, with Samsung always shipping the most smartphones over the iPhone’s consistent second place.
However, in 2023 Apple shipped the most smartphones for the first time, at 20.1% of the market vs Samsung’s 19.4%.
According to Statista, in the United States, Apple’s and Samsung’s brand awareness were 93% and 94% respectively in 2023 - and 49% of people who were aware of the brands owned iPhones.
When asked: “Which of the following brands are you likely to purchase again in the future?” 94% of respondents chose the iPhone, and 87% chose the Samsung Galaxy.
These numbers are neck and neck, so why Apple?
Well, the numbers tell an interesting story, which is that from an investor’s perspective, Apple is more efficient at creating shareholder value through capital allocation, evidenced by a higher return on invested capital.
The shear outperformance vs the next best competitor in the smartphone market suggests that Apple has strong competitive advantages and superior profitability.
Similarly, let's look at Coca Cola…
Coca Cola
According to Statista, in 2023 Coca Cola and Pepsi were tied for being the 2 soft drink brands with the highest brand awareness in the United States, recognised by 95% of survey respondents.
Of the brands surveyed, Coca Cola, Pepsi, and Keurig/Dr Pepper each own or license 26% of the brands.
So why does Warren Buffet like Coca Cola?
Again, the numbers are entertaining.
Noting that Pepsi has averaged $69 billion in global revenue from 2013 to 2022, vs Coca Cola’s $40 billion - from an investor’s perspective, Coca Cola generates more stable cash flows which afford the company the ability to pay a consistently high dividend to shareholders.
This consistency is owed to the fact that according to their 2022 annual filing, beverages bearing trademarks owned by or licensed to Coca Cola account for 2.2 billion of the estimated 64 billion servings of all beverages consumed worldwide every day.
In other words, Coca Cola serves 3% of the global market for all beverages.
So, what have we learned?
As a company builder, build a simple business with an excellent brand and maintain that brand to ensure longevity.
Apple sells smartphones, the standout KPI is selling more iPhones annually.
Coca Cola sells beverages. The standout KPI is dishing out more beverage servings annually.
As an investor, the decision to invest in a public company can be simplified by picking the category winner, which would be the company with the largest market share. Thereafter you would need to consider how you would make money on the investment, regardless of the size of your investment (i.e. if you had no control on the actions that the business takes daily). This would mean looking for a high and consistent dividend payout, management who are great capital allocators, a powerful sense of brand awareness among customers, and solid brand loyalty for the company.
In Buffet's words: “I like wonderful brands… if you take care of a great brand, it's forever.”
Respectfully,
-Mansa
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