Coca-Cola (KO) is a model of strength in longevity (130 years and counting!), diversification (20 brands with more than $1 billion dollars per year in sales), and rewarding shareholders of Coca-Cola stock (returned $39 billion in the last five years through dividends and share repurchases).
The company is also the largest seller of non-alcoholic beverages in the world. And as Ben Reynolds, editor of Sure Dividends, remarked in a recent issue of Wall Street’s Best Dividend Stocks, “Coca-Cola, with 54 years of consecutive dividend increases, is a Dividend Aristocrat (25+ years of rising dividends) and a Dividend King (50+ years of rising dividends). It is one of 18 businesses with 50+ years of consecutive dividend raises.”
But Coca-Cola stock hasn’t seen much love from investors recently. Here’s Ben’s take on that mistake: “Some believe that Coca-Cola’s best days are behind it. Soda sales have dropped for 11 straight years. Fiscal 2015 revenues fell 4% and operating profits dropped by 10%. Many believe that Coca-Cola is on the decline.
“This is not the case. In fact, the company still has plenty of room to grow. The beverage industry is expected to increase by $300 billion between 2015 and 2020, and the company continues to hold dominant market share.
“Although Coca-Cola has the third most valuable brand (estimated at $73 billion) in the world according to Interbrand, the company’s brands also include: Sprite, Minute Maid, Powerade, Fanta, Schweppes, Dasani, and Fuse Tea. This diverse product portfolio creates significant operational diversification, and insulates the company from any downturns in a single product.
“Between 2000 and 2015, the company has grown earnings-per-share from $0.74 to $2.00, equivalent to a CAGR of 6.9%. This growth in the underlying business has translated to phenomenal returns for Coca-Cola stock shareholders. Add in the dividends (which were increased again in 2016) and the more than $2 billion of share repurchases, and you can see why shareholders continue to be impressed.”
Future Coca-Cola Stock Catalyst: Higher Margins
Ben goes on to say, “Many investors view Coca-Cola’s decision to re-franchise the company’s bottling as a reversal of the 2010 decision to take ownership of the company’s independent bottlers (a decision that required a $12.3 billion investment from Coca-Cola). While that management decision certainly increased the operational size of Coca-Cola, it did not necessarily drive shareholder returns.
“The net effect of this new transition is to make Coca-Cola a smaller yet more profitable business that focuses on its core business: the production of syrups and concentrate. Coca-Cola expects that more than 90% of its revenues will come from this side of the business by year-end 2017.
“The size of this transformation cannot be understated. This change will downsize the company from 123k employees to 39k employees, and reduce the company’s internally-bottled case units from 18% to 3%. Offloading the bottling subsidiaries will significantly reduce Coca-Cola’s revenues. This has been negatively received by some investors. However, this will be offset by higher gross margins and increased net income for the company.
“Coca-Cola stock is the most-owned dividend growth stock among dividend growth bloggers, and one of Warren Buffett’s top 20 high dividend stocks—a foundational stock for dividend growth investor’s portfolios.”
Management Changes Stress International Growth
And the bottling change is not the only shake-up at Coca-Cola. Last week, the company announced that President and Chief Operating Officer (COO) James Quincey will become chief executive officer (CEO) on May 1.
As well, the company created a new position, its first “Chief Growth Officer”—Francisco Crespo, the current president of the firm’s Mexico unit. He will be charged with expanding global growth in sparkling, juice/dairy/plant-based, tea and coffee, water and enhanced waters and energy drinks. And Coca-Cola also appointed Robert Lang, current VP of research and development, to chief innovation officer.
A Wells Fargo (WFC) analyst lauded these developments, saying, “On a high level, it appears that KO is organizing its business to increase focus on R&D/innovation and technology which we believe is positive and places it in a stronger position for the future.”
The company was also recently recognized by a contributor to Motley Fool’s website, who noted, “If you’re looking for a stock that you don’t have to babysit, look no farther than Coca-Cola stock.” He cited the company’s diversification and proven track record as good reasons to add KO stock to your portfolio.
I agree with both.