SunTrust’s Coca-Cola Position

by The Compound Investor

The Southern states of the US hold some truly great stories of the riches created by investments in Coca-Cola stock. Take the legendary tale of Quincy, Florida, one of the first posts covered on the site. Back in the early 1920s a group of tobacco farmers invested their profits into the newly IPO’d Coke on the enthusiastic advice of a local banker. According to the LA Times, the Quincy millionaires were sitting on $375m worth of Coca-Cola shares by the late 1990s. From restored churches to theaters, the wealth emanating from that decision is visible in the town to this day.

Another favorite of mine is the story of SunTrust Bank. This one goes all the way back to 1919 when the precursor to the modern day Coca-Cola Company was purchased by a group of investors for $25 million. They took the company public for $40 per share shortly thereafter. SunTrust, or rather its predecessor, the Trust Company of Georgia, acted as the lead underwriter for the stock offering. Its fee for this service came to around $110k in 1919 terms.

What followed next is now one of the most famous examples of long-term investing. Rather than settle the fee in cash, the bank chose to accept payment in Coca-Cola shares instead. The sheer scale of wealth creation stemming from that decision was extraordinary. By 2007, the bank’s Coke shares were worth around two billion dollars against that initial book cost of just $110k. Even after ninety years of inflation the real terms wealth creation is equivalent to turning one dollar into over a thousand dollars. The compounding was so crazy that by 2007 SunTrust was receiving ten times its initial investment in quarterly dividend payments after adjusting for inflation.

There are a couple of interesting things to note about this story. Well, three if you include SunTrust’s decision to sell its entire Coca-Cola stake between 2007 and 2012! Firstly, take a look at the length of time. Most of us deal with a horizon that maybe stretches forty years. If we get lucky, like some of the folks mentioned on here, that might stretch to sixty years. As a corporation, SunTrust’s relationship with Coca-Cola stock could, in theory, just keep on going. However, check out what happens when you halve the holding time. Let’s take SunTrust’s average annual return from its Coke investment to be 11.50%. After forty-five years that grows the initial $110k to $14.75m. So that’s half the time, but only a much smaller fraction of the returns.

The second point to note concerns our obsession with portfolio tinkering. Now, by nature, us humans are prone to wild exaggeration. Even with one of the world’s most stable consumer companies you will find articles bashing its business. I guess the urge to turn a few ‘poor’ quarters into an existential threat is a strong one. The most powerful argument I can think of to counter the temptation to sell is to imagine a fifty stock portfolio. In fact, let’s use SunTrust as a guide. Imagine for a moment that alongside the Coca-Cola IPO the Trust Company of Georgia was underwriting forty-nine other IPOs. Each IPO attracts the same $110k fee which the bank accepts in stock rather than cash.

Now, these forty-nine other investments don’t do as well as Coke. In fact, they return nothing at all. Every one of them ends up as a zero. In total, our bank has a book cost of around $5.5m for these positions. The effect of forty-nine losers and one Coca-Cola reduces the total return from 11.5% per annum to around 7% per annum. Think about that for moment. 98% of this hypothetical initial portfolio ends up worthless yet 2% in a stock like Coca-Cola elevates the average annual total returns to four percentage points above inflation.

The power of one ‘winner’ reminds me of a remarkable statistic from Dr Jeremy Siegel’s book – Stocks For The Long Run. According to Siegel, an investor purchasing the original five-hundred S&P 500 firms in 1957, and nothing else thereafter, would have outperformed the index. This isn’t me attacking the idea of index tracker funds, rather it’s some food for thought next time you’re tempted to dump a stock because it had a poor quarter.

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