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2 Stocks That Could Create Lasting Generational Wealth

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Written by Tony Dong, MSc, CETF® at The Motley Fool Canada

Did you know that Warren Buffett isn’t the only individual who has amassed a fortune from investing in The Coca-Cola Company (NYSE:KO)?

In fact, there’s a small town in Florida called Quincy that’s famously home to a group known as the “Coca-Cola millionaires.”

This phenomenon occurred because a local banker, believing in the potential of Coca-Cola during its early years, advised residents to buy and hold shares.

Many followed his advice, and over the decades, as Coca-Cola’s value soared, these early investors saw their wealth multiply significantly due to dividend growth, share splits, and buybacks.

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This story from Quincy is a classic example of the power of compounding and the importance of time when investing in quality companies. It illustrates how patience and long-term thinking can turn consistent investments into generational wealth.

With this in mind, let’s look at why Coca-Cola continues to be a compelling investment and explore another stock that might just set the stage for the next generation of Coca-Cola millionaires.

Coca-Cola today

Today, The Coca-Cola Company is a veritable behemoth in the beverage industry, boasting a market capitalization of $270 billion and a diverse portfolio of over 200 brands.

While you might be familiar with its flagship product, Classic Coke (my personal favourite), the company also owns other popular brands like Fanta, Sprite, Minute Maid, Powerade, and more.

Interestingly, Coca-Cola doesn’t directly sell these drinks. Instead, it produces and sells syrup concentrates to bottlers across different geographic regions under exclusive contracts. This business model is crucial for maintaining high profit margins.

By selling the concentrate rather than the finished product, Coca-Cola minimizes its production and distribution costs. This strategy significantly contributes to the company’s impressive profit margin of 23.41% and an operating margin of 32.97%.

Moreover, Coca-Cola has consistently demonstrated its commitment to shareholder value. The management recently increased the dividend to US$0.485 per share, marking the 62nd consecutive year of dividend raises.

Currently, the stock offers a dividend yield of 3.1%, underscoring its status as a reliable investment for income-seeking shareholders.

Coca-Cola Bottling stock

Remember those bottlers I mentioned earlier? Many of them started as family-owned companies with exclusive contracts to bottle Coca-Cola products, and the most successful ones have morphed into publicly traded companies.

One prime example is Coca-Cola Bottling (NASDAQ:COKE), the largest Coca-Cola bottler in the United States. While it’s not nearly as large as The Coca-Cola Company, with a market capitalization of $8.9 billion, it is definitely a growth name worth keeping an eye on.

Unlike its namesake, Coca-Cola Bottling does not focus heavily on dividends as a means of rewarding shareholders—it currently yields only 0.21%. Instead, the company emphasizes buybacks as a strategy to enhance shareholder value.

Essentially, by buying back shares, the company is reducing the supply of its stock, making each remaining share represent a larger ownership stake in the company.

Recently, Coca-Cola Bottling announced a significant buyback program, planning to repurchase $3.1 billion of its own shares. Given its current market cap, this buyback represents around 35% of its shares outstanding.

This means that your ownership stake in the company is set to become significantly larger, as there are fewer shares available, and therefore, each share holds more value.

The company is financing this ambitious buyback by taking on additional debt. While this strategy can be concerning to some investors due to the increased financial risk, it is a common practice for companies seeking to leverage their operations and boost earnings per share.

The post 2 Stocks That Could Create Lasting Generational Wealth appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has positions in Coca-Cola and Coca-Cola Consolidated. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2024