Donald Yacktman is president of the Yacktman Funds and is responsible for the management of over $500 million in assets. The Coca-Cola Company is a global beverage manufacturer based in Atlanta, Georgia. Mr. Yacktman explained to David Dalley of The New York Sun why Coca-Cola is his top stock holding.

Why are you invested so heavily in Coca-Cola?

Well, to begin with, you have to look at the marketplace. The difficulty with the market today in contrast with 2000, for example, is that all stocks are priced very expensively. In 2000 you had an expensive section of stocks in the tech sector, but today it’s more widespread. So what’s showing up as attractive on our methodology are high quality, profitable, but not particularly fast-growing stocks like Coke.

Coke is now selling at around $41 a share. Back in 1998, it sold at about $80 a share. It’s suffered a huge decline from where it was when everyone loved it. Now it’s on the hate list. But it continues to be a money machine – it just needs a bit of oiling.

It also happens to be one of the top brands around the globe. It’s not the kind of stock that will double or triple overnight, but it does offer a very high quality reasonable return relative to what’s out there. Its accounting standards are very conservative, and the quality of its profits is very high. More than three-quarters of earnings come from outside America. People tend to think of Coke as an American company, and then they start thinking in terms of the local competitive environment. But if you look overseas, there are a lot of countries where if you want a soft drink, it’s a Coke. The market share overseas is huge. The end result is a company generating a lot of cash from good quality, stable sources.

Why, then, has the stock price stumbled?

The challenge, I think, is for the company to find good acquisitions, businesses that it can reinvest its cash flow in. There aren’t many high-return, well priced options out there right now. They tried to buy Quaker Oats, but they were outbid by Pepsi. The bottom line is that it would be nice if they could find a synergistic acquisition that isn’t too expensive, and they’ve struggled in that area.

Why is now a good time to buy?

Look at the rates of return – this company has some of the highest rates of return in the market relative to its risk. Coke has historically sold at a good premium, and at today’s prices the market is placing no premium at all on the stock.

It’s a hard market that we’re in, and it’s hard to find bargains. The result is that the things that show up as being the best overall value, in terms of growth, profitability, and all those things, tend to be the very big high quality companies like Coke, Kraft, and Pfizer. They look dull from a recent price movement point of view. But they’re very good long-term strategies.

The market has punished Coke for not growing fast enough. But even if the growth trends don’t change, we still think it’s a good value investment. If you got any improvement in growth, it would be a surprise on the upside. It’s a defensive kind of stock. You win in the long term by having a good defense. If you start with offense, you can find yourself stuck with a lot of Roman candles or shooting stars.