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This Beverage Giant May Reap Potentially Good Returns for Its Investors

January 21, 2014 | About:
abirk

abirk

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Soft drinks have always been a hit among people of all ages, until recently. This trend has taken a dip as weight gain, poor dental health, diabetes and cardiovascular diseases are on the rise. People are now much more health conscious as the rate of obesity is accelerating at a great pace. Sugar, being the most important ingredient of soft drinks, is the main contributor to obesity. Even with the rising fear among calorie-conscious consumers regarding cola beverages, Coca-Cola (KO) is a company which may provide long-term returns to its investors.

Today, there's no question that consumers are much more empowered. The social media scene is exploding, and gone are the days when you simply needed to create impressions about your brands with consumers. Now it's all about expressions — communicating in a dialogue with consumers to meet their expectations. Take the Coca-Cola Facebook page as an example, which has more than 76 million likes. It is the largest Facebook page of any single brand.

Performance Report Card

Coca-Cola offers constantly growing dividends with stable price appreciation. The company has also backed its return with a solid financial position. The company is looking to shift its focus toward franchising. This means Coca-Cola is moving its revenue base more towards fees instead of sales. With the move in revenue generation, I think Coca-Cola will sustain its returns over the long term.

One of the main benefits of an investment in Pepsi is that it's a rock-solid dividend stock, even if it doesn't garner the same notability as other high-flying growth stocks. Yet that means it's also likely to crash and burn, and over the long term, the compounding effect of its quarterly payouts, as well as its growth, adds up faster than most investors imagine.

The company maintains a superior balance sheet in terms of cash and debt, giving it better protection against hard times and the ability to invest in its future. For example, more cash gives Coca-Cola a greater ability to invest in product innovation and less debt means lower interest payments translating into higher cash flow serving as a catalyst for future dividend increases and capital gains. As of the most recent quarter, Coca-Cola's cash stash of $17 billion represented 53% of stockholder's equity. It is paying its stockholders $1.12 per share per year in dividends translating into a 2.8% dividend yield. The company pays out roughly 40% of its free cash flow in dividends meaning the income stream remains relatively safe.

Head-to-Head

Coca-Cola faces stiff competition from PepsiCo Inc. (PEP), and Dr Pepper Snapple Group Inc. (DPS). There is intense competition between the companies. The companies not only compete in soft drinks, but also have branched out to other beverages including coffee, juice drinks and even water. If Pepsi were to offer a new product it wouldn't be surprising to see Coca-Cola follow suit. Coca-Cola entered foreign markets differently than Pepsi, providing it an edge over Pepsi.

Over the next decade Coke's global reach should give it the edge in the regions that offer the greatest growth. Moreover, Pepsi's success with snack foods may prove harder to maintain as consumers worry more about salt and fats.

Dr Pepper Snapple is also known for its consistent dividend payouts. It yields a dividend of about 3.2%, which is higher than the other two soda titans. But then again it has started to see its share of troubles since last year when its sales went flat for the first nine months, and operating income also declined during the first three quarters of 2013.

Global Acceptance

Coca-Cola's presence is felt across the globe. One of the reasons that Coca-Cola resides in the No. 1 market spot lies in the fact it maintains a presence all over the globe. India, Indonesia and China hold huge potential for this company, leaving plenty of room for it to expand. Coca-Cola India is aiming to get back on to the double-digit growth trajectory over the next year as it focuses on the Indian market, which is by 2020 expected to become the fifth largest in the world from its current seventh position.

The company said it is working towards achieving the 2020 vision of doubling system revenues and servings and revealed that India would be a strategic growth market vis-a-vis that goal. The company had lined up $5 billion till 2020 in India. With a per capita consumption of 14 per year for Coca-Cola products, as compared to the global average of 94, the Indian market offers huge opportunity for growth

To End

Coca-Cola is focused on delivering sustainable long-term growth and strong cash returns to shareholders. With this momentum, Coca-Cola is expected to quench the thirst of its consumers in the recent times to come. Coca-Cola's $17 billion in cash and investments gives it the resources necessary for product innovation. This adds to their appeal as long-term investments. An increasingly evolving middle class, higher disposable incomes and changing lifestyles are key factors that will fuel growth of this company in the beverage industry.


Rating: 4.1/5 (9 votes)

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