Do you pick the S&P500 or KO?

KO - Coca-Cola

The Coca-Cola Company is a leading non-alcoholic beverage company globally, providing both sparkling and still beverage. Out of the 61 billion servings of beverages consumed worldwide every day, Coca-Cola accounts for more than 1.9 billion.

As the largest non-alcoholic beverage company in the world, Coca-Cola has a huge product portfolio consisting of 4300 beverages and more than 500 brands. The company owns 21 multi-billion dollar brands such as Sprite, Fanta, Minute Maid, Diet Coke and more.

Coca-Cola operates the world’s largest beverage distribution system consisting of a network of bottling partners, distributors, wholesalers and retailers. Its footprint extends to over 200 countries through 28 million outlets worldwide. The company has a uniformly diversified geographical presence around the globe in North America (accounting for 20% of 2018 unit case volume), Latin America (27%), EMEA (30%) and Asia- Pacific (23%).

The company’s operating segments are Bottling investments (accounting for 12% the company’s 2018 revenues), followed by North America (36%), Europe, Middle East & Africa (22%), Asia Pacific (16%), Latin America (12%) and Global Ventures (2% – established in January 2019).

Investment Data

Revenue Growth & Market Exposure

The Coca-Cola Company owns four of the world’s top sparkling soft drink brands Coca-Cola, Diet Coke, Fanta, and Sprite. Its products can be categorized into sparkling soft drinks; water, enhanced water and sports drinks; juice, dairy and plant-based beverages; tea and coffee; and energy drinks.

In addition to Coca-Cola brands, the company’s portfolio includes some of the world’s most valuable beverage brands, such as AdeS soy-based beverages, Ayataka green tea, Dasani waters, Georgia coffee, Gold Peak teas and coffees, Honest Tea, Minute Maid juices, Powerade sports drinks, Simply juice, etc.

KO - Reveue Breakdown
Source: Investor Presentation

Coca-Cola has been continually evolving with changing consumer tastes and buying habits. With increasing health awareness, about one-third of Coca-Cola’s product portfolio is now zero to low-calorie and includes more innovative products for its consumers. The company launched 600 new products in 2018, out of which more than 250 were low to no sugar products. Coca-Cola is favorable placed to tap the increasing trends of consumerism in the emerging markets too.

Other than a large portfolio of different products and an extensive geographic footprint, Coca-Cola has developed strong ties with industry suppliers over the many years of its existence. The company operates through a network of 28 million retail customer outlets, 700,000 system associates, 225 bottling partners, and 900 bottling plants worldwide.

The company has undergone a transformation that resulted in an asset-light model. As a result, the company experienced significant improvement in its operating capital and revenues. Coca-Cola is expecting its organic revenue to grow at 4%-6% in the long term.

Coca-Cola Company has a solid and impenetrable brand recall. The company is the third most valuable brand in the world with an estimated value of $73 billion. Disciplined portfolio growth, expanding consumer base, unique revenue growth strategy and investment in digital growth should drive top line growth in the future.

Dividends

Coca-Cola Company is a dividend king paying dividends for almost a century now and increasing them for 57 consecutive years. It has clocked a 7.5% dividend CAGR over the past decade and has a dividend yield of 3.3%. Though its payout ratio is on the high side, the company has been a consistent cash flow generator over the years, which should continue to support dividend growth in the future as well.

The company’s earnings are highly diversified by products, product categories, geographies and markets. Given its complementary product portfolio, Coca-Cola is in a good position to cater to the growing $1.5 trillion hot and cold beverages industry.

KO - Opportunities

The company is expecting its long term margins to grow with a disciplined portfolio growth approach as well as its non-sparkling category, which generates strong dollar earnings. A globally recognized brand name, a massive customer base, and global reach are Coca-Cola’s biggest strengths.

Coca-Cola last increased its dividend by 2.6%. The company has returned more than $7 billion to its shareholders via dividends and share repurchases in 2018. It has set a target of 75% payout ratio and free cash flow conversion ratio of 90%-95% in the long term. Coca-Cola is also looking at growing its earnings by 7%-9% in the long term. Future dividends can, therefore, be expected to increase in the low to mid single-digit level.

Competition

Coca-Cola functions in the highly competitive nonalcoholic beverage segment of the commercial beverage industry. The company faces competition from small regional and local companies, as well as very large and well established players. Some of Coca-Cola’s products highly prone to competition are non alcoholic sparkling soft drinks, various water products, juices and nectars, coffee, teas, energy and sports drinks, etc. PepsiCo, Inc., is one of Coca-Cola’s primary competitors. Other significant competitors include Nestle, Keurig Dr Pepper, Groupe Danone, Mondelez International, The Kraft Heinz Company, Suntory Beverage & Food Limited and Unilever.

Bottom Line

Coca-Cola is a popular household name and the No.1 beverage company across the world by value. The popularity of its brand can be gauged by the fact that $1 out of every $4 that a consumer spends on buying a non-alcoholic drink worldwide is on Coca-Cola. The company occupies a strong leadership position in 32 out of the 40 top markets and in over 75 categories. Focus on customer centric transactions, investing in innovative products and technology, and a clear strategy for sustainable growth should help the company support its dividend growth streak in the future.

With that said, even with a strong business, growth can be limited. Coca-Cola is another stock I used to own and one of my first US stocks. Unfortunately, after getting setup with my performance tracker for the true rate of return on my investment, I realized there were better options. KO and other consumer defensive stocks are very defensive and there is a place in a portfolio for at most one or two so choose carefully. The dividend growth is not what it used to be. It has slowed down over the past 10 years. From 7.46% 10 year ago to 5.73% just 3 years ago. A slowing dividend growth implies a slowing revenue growth which trickles down to a less performing stock overall.

For Canadian investors, KO sails above the TSX. This is a low risk investment that beats the TSX hands down. When you think of a Canadian consumer defensive stock, consider what KO can do for your portfolio instead of the Canadian alternative.

KO vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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