Coffee, espresso, coke and investing: II

The Coca Cola stock vs. Starbucks stock
In last 10 years (Mar 6 1998 to today Feb 28 2008), according Google Finance, SBUX went up from 4.93 to 18.78 (+280%, split adjusted, SBUX has not paid any dividend). That’s about 14% price appreciation annually.

On the other hand, KO went from 68.66 to 59.56 (-14.44%). But there is a caveat, Coca Cola pays out a cash dividend each quarter, so we should adjust the dividend when calculate Coke’s return.

Use the discount Present Value (PV) method, and the 10-year dividend for KO. For the sake of simplicity, let me use the dividend from year 1998 to 2007. There is just a few cents difference if I use 3 quarters dividend in 1998 and one quarter dividend in 2008. The following are the dividend history for Coca Cola in last 10 years (in dollars).
1998: 0.60
1999: 0.64
2000: 0.68
2001: 0.72
2002: 0.80
2003: 0.88
2004: 1.00
2005: 1.12
2006: 1.24
2007: 1.36 (+59.56) = 60.92 (that’s the year 2007 cash flow, as if we sold the stock at the time)

Using my financial calculator Cash Flow function (initial cash out flow $68.66) the KO’s internal rate of reurn is -0.0092%, that’s flat!

So from mathematically sense, an investor would be better off buying SBUX on early 1998 (vs. KO) for 10 years.

Why Buffett bought Coca Cola stock, not the Starbucks?
Well, firstly he drinks a lot Coke (he doesn’t drink coffee), as I saw from the CNBC show “Buffett goes global”, coke is the main caffeine source for Buffett. But that’s not the only reason Buffett bought coke (KO).

Note Starbucks (SBUX) came to public in early 1990s, while Buffett started buying Coke in 1980s (not in 1998), when he started build up his stock portfolio for Berkshire Hathaway.

Would Buffett/Berkshire Hathaway better off selling Coke and buying Starbucks in 1998?
We should know Buffett is not just looking for the numbers I calculated above when he looks for investments (he has his own criteria such as moats, or competitive edge in an industry). Also, he used different yard stick to measure investments (some of them are not numbers).

One thing I noticed Coke has grown into No. 1 soft drink in China and many developing countries in last 10 years. This means future growth opportunity for them.

Also Coke pays out cash dividend every quarter, just like a can of Coke gives 34 mg caffeine (stimulus) every a few hours for Mr. Buffett. We all know Mr. Buffett is best person in the world of allocate capital (use the cash for investments, or put it in the bank if he does not find any interesting opportunities).

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