Coca-Cola (KO, Financial), the world’s leading beverage maker, is trading at an attractive yield of 3.2%, mainly because the stock price barely moved in the last three years.
Revenue has been declining since 2012, as consumers around the world keep moving toward healthier drink options. Coca-Cola wasn’t sitting still, because it knew from its own sales number that it needed to improve its product line and pack in more diverse product options that can address those changing market dynamics.
Any company that is not able to adapt to market conditions will have only one way to go, and that will be down. Thankfully, Coca-Cola wasn’t stubborn and was ready to accept the need for change.
“A lot has changed in 40 years. Our portfolio has grown from a handful of brands to more than 500. We’ve built strong businesses in juice, tea, coffee, sports drinks, water, energy drinks and value-added dairy. We offer many more package choices. And about a third of our product portfolio is now no- and low-calorie,” wrote Coca-Cola Chairman Muhtar Kent in his letter to shareholders.
Net revenue during the second quarter of the current fiscal declined by 16% thanks to bottling divestitures and a stronger U.S. dollar. Organic revenue grew 3%, thanks to strong growth in Coca-Cola’s healthier drinks. Unit volumes of low- and no-calorie sparkling soft drinks grew midsingle digits during the quarter while Coca-Cola Zero Sugar grew in double digits in Europe. The company is slowly launching Zero Sugar across the globe, a good indication of the direction the company will be taking over the next few years.
Coca-Cola is already pushing in a healthier direction, which is good for the new generation of consumers, not to mention the company’s future. Revenue growth will take time to kick in, but organic sales are already showing signs of improvement. The market knows the changing dynamics and Coca-Cola’s ability to get things back on track, and that's why the stock price has been on a painfully slow move upward in the last five years instead of inching lower and lower.
At the end of the second quarter Coca-Cola had $22.37 billion in cash and $4.4 billion in marketable securities against long term debt of $31.805 billion. With a net interest expense of $103 million, Coca-Cola’s balance sheet is strong enough to keep the dividends flowing for many more years.
In fiscal 2016, Coca-Cola paid $6.043 billion in dividends, which is nearly 70% of its operating income. There isn’t much room for dividends to grow until revenue starts growing. But the strength of the balance sheet does give enough room for Coca-Cola to get its revenue back on track. With organic sales now starting to grow, the risk versus reward balance is a bit favorable for investors who are ready to capture the above-3% yield.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
