Coca-Cola (NYSE:KO) is a non-alcoholic beverage company that has refreshed us for over a century now. Similarly, the company, and its consistent dividend and share repurchase program, has been a great value addition for investors' portfolios. Coca-Cola is one of the most recognized brand names in the world, and it fits well into our daily lives, so let’s find out how well it will fit our portfolios.
Changing According to the Needs of the Market
The U.S. population has never been so concerned regarding its health than it is today. Coca-Cola has made some radical changes over time to meet the needs of consumers. The company was the first to come up with a diet version of its favorite classic, Coca-Cola, which has now become the second most-selling soft drink after regular Coca-Cola, and has even surpassed sales of regular PepsiCo (NYSE:PEP), now the U.S.’s third most sought-after soft drink.
- Warning! GuruFocus has detected 3 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
Soda companies were facing a hard time as news reports were continuously flashing how cola can cause cancer. Recently, an article from NPR reported that Coca-Cola was the first soda company to eliminate the chemical 4-MEI from its drinks, which has been linked to cancer. The company has replaced 4-MEI with another chemical that is less abrasive. This shift has definitely raised the company’s image among loyalists, which should definitely add to its benefits in the future.
Coca-Cola has also put a lot of effort into creating and marketing healthy alternatives for soda. Its healthy alternatives include brands like Dasani bottled water, Minute Maid juices, Odwalla juices, PowerAde and PowerAde Light. Odwalla’s fruit smoothie and protein-packed shakes are available in handy servings and are well-accepted by younger consumers. Dasani bottled water has also gained great acceptance and has become one of the most known brands of bottled water.
Huge, but Still a Lot of Scope
Currently, Coca-Cola is the world’s largest soft drink company, selling its portfolio of 500 brand named products in over 200 countries. More than one-fifth of Coca-Cola’s revenue comes from the U.S. market, which makes its growth possibility from the North American market (in regard to its core products) quite saturated. However, the company’s expansion into newer products, with U.S. customers becoming more health conscious, opens several new avenues for the company to grow domestically.
Coca-Cola’s revenue from international markets is growing consistently, clearly indicating that the company’s global market still has tremendous opportunities. The beverage giant understands that growing in emerging markets won’t be easy, as most of the markets lack proper infrastructure. Thus, it has announced plans to invest more than $30 billion in developing markets around the world over the next five years. The company’s initiatives seem to be paying well, as it registered 18% growth in Thailand, 8% in India and Russia and 3% growth in Mexico and Brazil.
Good with Employees and Investors
Coca-Cola has been a fair and decent employer over years, which has helped it create a team that performs well. The confidence that the company and its employees have in each other has made Coca-Cola stand as the most superior employer among major beverage companies.
Coca-Cola employees have rated their employer a 3.5 of 5 on Glassdoor.com, where 69% would willingly recommend the company to their friends, and an inspiring 86% of employees support CEO Muhtar Kent. Pepsi was reported as the second best beverage company to work for, as its employees rated their employer a 3.3 of 5, 64% of workers would suggest Pepsi to a friend, and 71% of the workforce approves of CEO Indra K. Nooyi. Dr Pepper Snapple (NYSE:DPS) got a rating of 2.7 of 5 from its employees, which is below average. Further, 43% of employees would advise the company to a friend, and 44% approve of CEO Larry D. Young.
Coca-Cola has been of great value to investors, according to an article I read last year that elaborated on what was written in Coca-Cola's proxy statement. According the company’s statement, a share of Coca-Cola worth $40 if purchased in 1919, with dividends reinvested, would be worth $9.8 million today. This clearly signifies how important dividends are in adding value to investments. Coca-Cola currently yields a dividend of 2.67%, while its close competitor, Pepsi, yields 2.78%. The average five-year growth rate of dividends is 8.45% for Coca-Cola and 8.35% for Pepsi.
A Look Around
According to Beverage Digest, Coca-Cola clearly leads the soft drink market with a 34% share, while Pepsi owns 26.3% of the market share and Dr Pepper has 11%. Pepsi is clearly the closest competitor and has the strongest global reach that can affect Coca-Cola. Further, Pepsi’s food division accounts for half of its revenue and has a strong 40% market share of the packed salted snack market, which gives it a leverage for a more diversified product range. Coca-Cola also scores above Pepsi, as its reach is far more extensive in restaurant chains and food outlets like McDonald's, Subway and Nando’s, while KFC and Taco Bell only sell Pepsi soft drinks.
Dr Pepper is a comparatively small player compared to the two giants. It has a very concentrated area of operation, as almost all profits come from the U.S. and Canada. Further, the company depends on Coca-Cola and Pepsi for two-thirds of their distributions. Dr Pepper is introducing its "TEN" low-calorie drinks, which include 7UP TEN, A&W TEN, Sunkist TEN, RC TEN, and Canada Dry TEN, which have only 10 calories per 12 fluid ounces. This seems like a smart move to attract health-conscious customers.
Dr Pepper, since its inception, has been making the right moves, which have clearly been seen in the company’s stock price performance. The company’s revenue and profits have been improving consistently, but as the company mainly has a concentrated exposure without much penetration into emerging markets, its future growth prospects look dim. With a dividend yield of 3.2%, it can definitely attract income investors, but it definitely does not offer as much value as its peers.
Coca-Cola is, without a doubt, a strong value addition for any portfolio with a long-term view. Its strategic investment in health drinks, plus investments in emerging markets, confirms a strong potential to grow further in the future. Pepsi, too, is a well-run company and a good value for an investor’s money. Both of these giants offer stability to their investors.