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, have been a great value addition for investors' portfolios. Coca-Cola is one of the most recognized brand names in the world, and it fits wellinto our daily lives, so let’s find out how well it will fit our portfolios.
Reason 1: Buffett's Favorite
It is a no brainer for anyone to point out that Coca-Cola is one of Mr. Warren Buffett's favorite stocks after he began purchasing the stock in 1988. At that point in time, many analysts were skeptical because it only seemed a matter of time before any other beverage companies would overtake Coca-Cola and it could fall as a result of fierce competition. However, this skepticism did not deter Buffett, whose firm Berkshire Hathaway now owns approximately 9% of the total outstanding shares (as of last month). Thus, it is clearly evident that the company has sustained its performance over the last few decades and instead of falling out of the race, it has continually gained market share.
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- KO 15-Year Financial Data
- The intrinsic value of KO
- Peter Lynch Chart of KO
Reason 2: A company that knows to adapt
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.
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.
Reason 3: Scope to get bigger
Currently, Coca-Cola is the world’s largest soft drink company, selling its portfolio of 500 brand named products in over 200 countries. While 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.
Reason 4: A fair and just employer
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.
Reason 5: Better than peers
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 (NYSE:DPS) has 11%. Pepsi is clearly the closet 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 McDonalds, 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.