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Key Points
Warren Buffett believes pricing power is indicative of how strong a business is.
The stocks listed here are leaders in their respective industries and have shown over the years that price hikes won't dissuade their customers.
Billionaire investor Warren Buffett once said that "the single most important decision in evaluating a business is pricing power," and that "if you've got the power to raise prices without losing business to a competitor, you've got a very good business."
For Buffett, that's a sign of a strong competitive advantage, or moat. If prices don't dissuade customers, that symbolizes strong brand loyalty, perhaps even a necessity that consumers can't do without. Three stocks with plenty of pricing power and that can make for good long-term investments are Coca-Cola (NYSE: KO), Apple (NASDAQ: AAPL), and Netflix (NASDAQ: NFLX).
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Coca-Cola
Buffett is a big fan of Coca-Cola, and it's his go-to beverage, once admitting that one-quarter of his daily calories are from Coca-Cola products. Buffett and many other Coca-Cola loyalists may not want to pay more for the company's products, but would grudgingly do so if the company raised prices.
The company did have to hike prices amid inflation in recent years, and that didn't have a devastating impact on its business at all. Sales and profits have continued to grow for Coca-Cola, and its margins are as solid as ever, with the company reporting $13.7 billion in profit over its past four quarters on revenue of $49.2 billion, which means roughly 28 cents of every dollar of revenue makes it through to the bottom line.
Coca-Cola's robust business generates modest growth, but it's sufficient to enable the company to reinvest in its operations and also grow its dividend, which it has for decades. And with an above-average yield of 2.6%, it can be a safe-haven investment that dividend investors can comfortably hold in their portfolios for decades.
Apple
Top tech giant, Apple, is another company that can afford to increase prices and still do well. That's because its iconic iPhones are a bit of a status symbol that consumers are willing to pay more for. And once they're within Apple's vast ecosystem, it's hard for consumers to readjust their entire digital lives and profiles to fit a different one, even if they wanted to. Thus, there's a costly, time-consuming barrier that deters many Apple customers from switching. It may not be impossible, but it's certainly not easy.
Buffett is a fan of Apple, once referring to it as "probably the best business I know in the world." Despite a lack of innovation over the years, besides just making modest changes to its iPhones, consumers continue to buy and upgrade their devices even as prices rise higher. Meanwhile, Apple has also been expanding its services business so that it can still make money off its existing users even if they aren't buying new phones or tablets every year.
Apple may not be the leader in artificial intelligence, and it's been criticized for being a bit of a laggard in that space, but that hasn't hurt the tech stock, which is among the most valuable in the world, with a market cap of around $4.8 trillion.
Netflix
The only stock on this list Buffett hasn't bought is Netflix, but it fits the mold of the others listed here. It generates strong margins, is a leader in its industry, and has been able to raise prices without much impact on demand.
If Buffett were more comfortable with streaming stocks, Netflix is one that I believe he'd buy for its dominant market position. While consumers may have become frustrated with the streaming company's price increases over the years, it still offers a fairly attractive value proposition, with plans of around $20 that provide access to a wide range of movies and TV shows. It also has a lower-priced option with ads that can appeal to consumers on tighter budgets.
The company has generated strong growth in recent years, as price hikes have helped rather than hurt the business. Last year, the company's profit totaled $11 billion, a little more than double the $5.4 billion it reported two years earlier.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Netflix. The Motley Fool has a disclosure policy.
