Coca-Cola (NYSE:KO), the world's largest beverage maker, is giving its investors a lot of things to worry about.
One of the world's most valuable and recognizable brands, Coca-Cola has over 500 brands in its portfolio featuring 17 billion-dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, the Company boasts of being the No. 1 provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks. Yet, of late, the Giant has seen a marked slowdown in growth. To add to that, shareholders too aren’t happy with the management.
The Equity Plan That Is Not So Equitable
Value investor David Winters (Trades, Portfolio), CEO and founder of Wintergreen Advisers is not happy with the company's compensation plans for this year. He has even reportedly reached out to the shareholders, its board, and shareholder Warren Buffett (Trades, Portfolio) stating that the company’s 2014 equity plan will dilute the per-share value of the Coca-Cola stock.
- Warning! GuruFocus has detected 8 Warning Signs with KO. Click here to check it out.
- KO 15-Year Financial Data
- The intrinsic value of KO
- Peter Lynch Chart of KO
He was quoted as saying, "If approved, this plan in conjunction with previous equity compensation plans, will dilute existing shareholders by a company estimated 14.2 percent."
According to the plan, the management will issue an additional 340,000,000 Coca-Cola shares which at the current price would be worth approximately $13 billion. In effect, the board is asking shareholders for approval to transfer approximately $13 billion from the shareholders' pocket to company's management over the next four years.
While that does seem unfair to shareholders, the fact that the company has been buying back its shares as a way to offer shareholders a share of the company's profits, will now be seen as an eye wash as the proposed equity plan will effectively nullify the benefits of this program.
Growth Slows Down
Coca-Cola’s global volumes grew by just 2% in 2013. Globally, the beverage industry as a whole is struggling. Pepsico (NYSE:PEP) and Dr pepper Snapple Group (NYSE:DPS) are in a similar condition. While Pepsico just managed to grow by 1%, Dr Pepper Snapple's volume declined 2% in 2013.
Emerging markets like India, Brazil and China represent huge growth opportunities. In 2012, per capita consumption of Coca-Cola in India and China alone was over 50% of the worldwide average per capita consumption.
Take, for instance, the Indian market. The market share of Coca Cola in India is 56% while Pepsi has 34%. However, in most of the rural areas, the reach, visibility and distribution of Pepsi matches that of Coca-Cola, if not betters it. Tapping into this market is the key to addressing Coca-Cola’s slow down in revenue and profits.
Too Much Dependence on Beverages
Around 75% of Coca-Cola's volume comes from the beverage business. This figure is way too high compared to its rivals. Pepsico, for instance, is the world's largest snacks business and relies equally on both its businesses for revenue.
Apart from Soft Drinks, Coca-Cola can look to focus on its snacks business, bottled water, tea and juice drinks to offset the decline in soft-drink sales.
Thanks to Smartwater and Vitaminwater, bottled-water volume of Coca-Cola grew 5% in 2013 – which is more than double the soft-drink growth. Though Pepsi fares far better in the non-soft drink categories, it trails Coca-Cola in bottled water, having 10% market share against Coca-Cola’s 13%
Exciting Times Ahead
With more focus in the particularly untapped areas of emerging markets, Coca-Cola will see an increase in per-capita consumption. And with a little more focus on the non-soft drinks business and the interest of shareholders, the company can arrest the recent slide in performance.
Dividend stocks like Coca-Cola can be very beneficial. While they don't give you the excitement of high-flying growth stocks, they are are more stable and endowing. In the long term, the compounding effect of the quarterly payouts adds up to much more than they are given credit for.