It is commonly known wisdom that, to excel in any field, one of the best ways is to learn from the gurus in that space. Similarly, one of the most adored gurus in investing, Mr Warren Buffett (Trades, Portfolio), is a figure every investor looks up to and hence, a study of Berkshire’s investments is worthwhile. One of Berkshire’s biggest investments in the food & beverage space has been Coca-Cola, which has gained around 9.3% since the last year over some major developments in its portfolio. Recently, it expanded its innovative partnership with Keurig Green Mountain Inc. to offer select beverages from the portfolio of The Coca Cola Company’s (NYSE:KO) still brands in the Keurig hot brewing system in the United States and Canada.
- Warning! GuruFocus has detected 7 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
Acquiring its way to success
As per the terms of the agreement, Honest Tea, the nation’s number one organic bottled iced tea, will be the first brand from The Coca Cola Company available in K-Cup packs. The new Honest Tea K-Cup packs feature two products initially, unsweetened Just Green and Just Black iced teas. The new beverages will join Keurig’s current Brew Over Ice collection, a line specially crafted to brew hot beverages over ice with the Keurig hot brewing system, making it easy and convenient to get a refreshing iced beverage at home or in the office.
This is an interesting development for Coca-Cola because Keurig Green Mountain and Honest Tea share a longstanding commitment to organics and this would be the first time that the latter will be served in a convenient format. In fact, Coca-Cola has been on a stake acquisition spree lately and recently, it bought a 16.7% stake in Monster Beverages for an amount of approximately $215 billion.
As part of the new agreement, both the companies will modify their current distribution agreement in the U.S. and Canada by expanding into additional territories in these countries, as well as international markets. Monster will become the exclusive energy drinks partner of Coca-Cola, which will add another cash flow stream owing to the equity investment in Monster. Coca-Cola had considered acquiring Monster in early 2012, but decided to drop the deal in April. In the meanwhile, Monster’s market value has grown approximately three times since 2010 to reach around $14.5 billion presently. According to Bloomberg, the company’s sales are expected to swell by 53% through 2017, beating every other beverage company in the U.S. valued at above $50 million. Apart from strengthening domestic sales, Coca-Cola’s widespread distribution channels and marketing muscle could help generate meaningful growth for Monster internationally. Around 70% of energy drink sales globally are outside the U.S., but Monster sells only 21% of its drinks in international markets.
Coca-Cola has been a phenomenal value generator and has rewarded its shareholders with consistent and handsome dividends over time. As a matter of fact, the company has raised its dividend every year since 1963 as a result of which it is justified of holding the “dividend aristocrat” title. The company has paid $1.17 per share in the last twelve months and currently offers a dividend yield of 2.8% (on an annualized dividend of $1.22 per share).Over the last ten years, the company has increased its dividend at a CAGR of slightly more than 9%. These numbers highlight a very important aspect of investing i.e extracting continuous value out of your investments and at a pay-out ratio of around 60%, Coca-Cola is a worthwhile investment in that respect.
Battling the slowdown
In the recent years, Coca-Cola has not been able to report a robust growth due to the increasing mainly due to a growing consciousness among people to be healthy and fit. As with the fast food giants like McDonald’s (NYSE:MCD), Coca-Cola has also grown a reputation of being an unhealthy drink that has high levels of sugar and caffeine. As such, the company saw a decline in volumes in the U.S because the carbonated drinks markets slid approximately 3% in volumes.
However, Coca-Cola has been taking some strategic steps to tackle these problems. Recently, the company launched a new brand named Coca-Cola Life, which uses stevia as a natural, healthier sweetener and contains less calories than regular Coke. Coca-Cola Life is currently selling in some South American markets and will be released in the U.S. in September. Greensboro-based specialty grocer The Fresh Market is the first U.S. retailer to carry the soda, which launched in Argentina and Chile last year and has since been rolled out in Great Britain and Mexico.
In a nutshell, there is hardly any doubt that Coca-Cola has been a safe harbour investment for investors who do not seek volatility and a consistent income. Also, the company has not remained unaware of the challenges facing the carbonated drinks market and as mentioned above, it is taking adequate steps to battle the slowdown. Therefore, it is a safe and lucrative bet for your diversified portfolio.