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Coca-Cola: This Buffett Favorite Is Still a Good Buy

June 21, 2014 | About:
Vinay Singh

Vinay Singh

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While many people today may or may not remember that "Coke is the Real Thing," owning shares in this beverage giant could produce some real profit. While the stock has beensomewhat volatile of late, shares are trading close to their 52-week high, and this could signal higher investor confidence in the company's future.

Following a leader

Coca-Cola (KO) owns or licenses over 500 non-alcoholic beverage brands, includingcolas, juices, teas, coffees, enhanced waters, and energy drinks. Over its 80+ year history, thecompany has worked its way into the homes of those in the U.S., as well as worldwide.

Shares of Coca-Cola have been held for years by both individual and institutional investors.Coca-Cola shares have also been one of the largest holdings in Warren Buffet's Berkshire Hathaway portfolio for the past twenty years (to the tune of roughly 200 million shares), valued inthe $12 billion range. Although, for the past decade or so, the stock really hasn't performed up topar.

For example, even though the shares of Coca-Cola have come back quite nicely from the 2008-2009 recession, Coca-Cola stock still hasn't again reached the all-time high that it saw in thelate 1990s, only providing a total return of 33% since that time. Yet, as many investors will state,it's a far cry better than losing money!

Today's new cola wars

As far back as the 1980s, the "cola wars" between rivals Coke and PepsiCo’s Pepsi have been tested with consumers, prompting tasters to divulge which product tastesbetter. The "wars" between share price have been equally challenging.

Recently, though, Coca-Cola stock has been trading at 20 times earnings, a bit pricey for itssingle-digit expected return over the next few years. One reason for this is that sugarydrinks, including diet colas, just aren't selling as well as they did years ago. Today, in fact, thereare even anti-cola campaigns touting the benefits of staying far away from these types ofproducts.

This has led cola producers such as Coca-Cola to branch out into new product lines, includingbottled water, in order to stay ahead of the curve. For Coca-Cola, these include Dasani, VitaminWater, Smart Water, and Dasani Plus.

In February 2013, Coca-Cola announced an annual increase in its dividend. This will raise thequarterly dividend payout by 10%, from $0.255 per common share to $0.28. This equates to anannual per-share dividend to shareholders of $1.12, up from $1.02 per share in 2012. Thisdividend increase is certainly a positive sign and could signal good news for investors down theroad.

A taste of the competition

Coca-Cola's biggest rival over the years, PepsiCo, has been growing its revenue, despite thatgrowth being less than the industry average of 4%. The company's operating cash flow margin,though, is currently standing at an impressive low double-digits, or over $8.5 billion.

This beverage company is obviously doing something right, as its shares are up over 20% yearto date. A big component in PepsiCo's rising share price may not have anything at all to do withits cola products, though, but more to do with the company's snack food division. This areaalone recently reported a rise in profits of more than 10%.

Likewise, the Dr Pepper Snapple Group has also been showing someimpressive numbers of late. With the company's primary focus on the North American continent,roughly 90% of its sales in 2012 came from the U.S. alone.

This company is also providing a nice dividend yield to shareholders of just over 3%, based on apayout of $1.52 per share. And, although Dr. Pepper shares are currently trading at or abovetheir recent 52-week high, there could be a nice income opportunity here forinvestors, especially in light of the company's notable return on equity and reasonable valuationlevels.

Just like with Coca-Cola, both PepsiCo and Dr. Pepper have faced a few blows to share priceover the years, prompting a wide array of new products to fill grocery and convenience storeshelves. No matter what any of these three companies does, though, consumers will typicallystick with their favorite soft drink through thick and thin.

Moving into markets other than just cola has definitely kept all three of these companies fromseeing a loss of revenue, primarily given the big push for healthier lifestyles for both young andold. Coca-Cola's move into water and other more healthy alternatives has proven to be positivein this area.

The bottom line

Although Coca-Cola shares have not been exciting, right now may still prove to be a perfect timeto consider buying, or buying more. While the share price is only expected to increase minutelyover the near term, the company's dividend of $1.12 per share could provide investors withsome very nice income while they wait.


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