Do you pick the S&P500 or KO?

The Coca-Cola Company is a leading global nonalcoholic beverage company, 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 nonalcoholic beverage company in the world, Coca-Cola has a huge product portfolio consisting of 4,300 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. It’s 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, Latin America, EMEA, and Asia- Pacific.

The company’s operating segments are Bottling investments (accounting for 19% the company’s 2019 revenues), North America (31%), Europe, Middle East & Africa (18%), Asia Pacific (14%), Latin America (11%) and Global Ventures (7%).

Investment Data
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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. Coca-Cola enjoys market-leading positions in most segments it operates.

Coca-Cola Revenue Composition, 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. Its innovation has increased by ~150% since 2015. Coca-Cola is favourably 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 last 134 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. 

Due to the ongoing pandemic, Coca-Cola’s Q2 revenues declined by 28% mainly driven by pressure in away-from-home channels. Many of its restaurants remained shut down during the quarter. The EPS also declined by 32%. Coca-Cola is expecting the commercial beverage industry to remain vibrant in the coming period. The company is focusing on portfolio prioritization, strengthening execution capabilities, and capturing supply chain efficiencies for future growth. Coca-Cola is also streamlining the innovation pipeline both regionally as well as globally.

The company has undergone a transformation that resulted in an asset-light model. As a result, it experienced significant improvement in its operating capital and revenues. Coca-Cola did not provide FY 2020 financial guidance but expects organic revenue growth of 4%-6% in the long term. Its revenue growth management strategy rollout in seven markets has resulted in 6x ROI. 

Coca-Cola Company has a solid and impenetrable brand recall. The company is currently the sixth most valuable brand in the world. 

Dividends

Coca-Cola Company is a Dividend King paying dividends for almost a century now and increasing them for 58 consecutive years. It has clocked a ~7% dividend CAGR over the past decade and has a dividend yield of 3.4% currently. Though its payout ratio of 77% 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 $1.6 trillion hot and cold beverages industry. The company is also eyeing to build a world-class coffee platform with the acquisition of Costa.

Coca-Cola Diversity

Coca-Cola 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 2.5%. The company has returned $6.8 billion to its shareholders via dividends in 2019 and recorded $9.4 billion in free cash flows. 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 the competition are non-alcoholic sparkling soft drinks, various water products, juices and nectars, coffee, teas, energy, and sports drinks, etc. PepsiCo 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.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:KOKOCoca-ColaConsumer DefensiveBeverages - Non-Alcoholic0.6450.52217.0126.2026.201.930.03253.250.849741.640.078068Consumable - DiscretionaryNOYESYESYESUSA1
NASDAQ:PEPPEPPepsi CoConsumer DefensiveBeverages - Non-Alcoholic0.63139.56192.8727.6427.645.050.02932.930.809944.090.108176Consumable - DiscretionaryNOYESYESNOUSA1
NYSE:KDPKDPKeurig Dr Pepper IncConsumer DefensiveBeverages - Non-Alcoholic0.2529.210.000.000.000.000.02052.050.000040.60-0.322931Consumable - DiscretionaryNONONONOUSA1

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 many top markets and product categories. Coca-Cola is highly diversified with strong pricing power which grants it an edge over the competition. The company has long-term growth opportunities in both developing and developed markets. Solid liquidity position and strong balance sheet should support future dividend growth.

Dividend Adjusted Chart by StockRover.

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.