Coca Cola: The Pause That Refreshes ...

Sep. 4.13 | About: The Coca-Cola (KO)

… and a pause from which the company will continue to grow.

Coca Cola (NYSE:KO) in the USA and Coca Cola Amatil (OTC:CCALF) in Australia are both long term successful growth stories, and companies that market a brand with unmatched market share in the beverage industry. Not only successful in year on year growth and expansion within their respective regional markets, they are also favored by dividend growth investors - with Coca Cola featuring on the 'Dividend Champions, Challengers and Contenders' list produced regularly by David Fish. Coca Cola is a true champion, 52 years with continued dividend growth, but … like its Australian "son", both entities have struggled over the previous 12 months - taken a step back to pause and consider its future. This article will focus on the challenges and opportunities facing the Coca Cola brand at present.

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Coca Cola Performance

Coca Cola closed on 31 August at $38.18 per share, 12% lower than its 52 week high of $43.43 per share, and 7% higher than its 52 week low. It delivers a yield of 2.94%, P/E ratio of 20.11, and provides a return on equity of 26.61%. A snapshot of key financial performance figures is below:

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In its most recent earnings call transcript, CEO Muhtar Kent reported that while the company had experienced weaker second quarter results, it had none the less increased global volume by 1% over the quarter and by 3% for the year to date. The company said that adverse non seasonal weather conditions had affected consumption of beverage products, in addition to weaker sales in Europe stemming from the weaker economies still emerging from the global financial crisis. Growth in Eurasia continued despite softening economic conditions, with 9% growth across Eurasia, focusing on growing market share in China and India. The Asia Pacific Region also delivered an increase in growth by 2%.

A chart of Coca Cola's share price performance over the last 12 months is shown below:

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Coca Cola Amatil

In Australia Coca Cola Amatil announced a drop in sales volume and a likely profit downgrade. While the company has experienced reduced performance of late, this has largely been due to a price cutting war between Coca Cola Amatil and Pepsi, as they seek to assert their market share within the grocery oligopoly largely dominated by Woolworths and Coles Supermarkets. Despite this Coca Cola Amatil holds greater than 50% of market share within the Australian soft drink (SODA) market.

Coca Cola Amatil closed on 30 August at $12.28 per share, 19% lower than its 52 week high of $15.40 per share, and 4% higher than its 52 week low. It delivers a yield of 4.60%, P/E ratio of 17.30, and provides a return on equity of 26.90%.

A chart of Coca Cola Amatil's share price performance over the last 12 months is shown below:

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The Dividend Growth Attraction

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Remember it's not all about the company; it's also about you - the investor! One of the great strengths of Coca Cola (regardless of whether it is the US listed or Australian listed stock) is that is has a strong history of providing year on year growth in dividends paid back to investors. The charts below illustrate why Coca Cola is a dividend growth champion with 50 plus years of continued dividend growth, and Coca Cola Amatil is a dividend growth challenger with 13 plus years of dividend growth.

The attraction is simple, invest in a company with a strong brand, dominant market share, seek rewards in the mid to long term through capital growth, and in the short term through dividend income. The charts below outline the 10 year performance of both Coca Cola and Coca Cola Amatil with respect to annual dividends paid.

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Challenges and Opportunities

Both entities of the brand face ongoing competition from other beverage suppliers, most notably Pepsi, however the strong advantage here comes back to the fundamental competition around the base product 'cola' beverages. In my opinion, Pepsi might offer short term attraction when it discounts on price, but you can't beat the taste of Coke. I personally prefer Coke Zero, and having tried Pepsi Max on numerous occasions, I always come back to the real thing - the Coca Cola product. Consumer loyalty and product preference is a huge component of the Coca Cola Brand.

For Coca Cola it is looking to focus on developing emerging markets in Eurasia and South America. Coca Cola Amatil likewise is looking to grow its strength in the region, most notably in Indonesia, and domestically at home with a renewed focus on the alcoholic beverages market.

Summary

It has been a challenging 12 months but if you believe in the brand, the product and the company, then now is a good opportunity to pick up the stock trading at a discount to its intrinsic value. Coke will continue to follow its tried and proven tactic of redeploying cash flow using the following consistent and disciplined framework:

  1. Reinvest in the business - strengthen the system.
  2. Expand the enterprise through suitable 'bolt on' acquisitions and partnerships.
  3. Return dividends to shareholders, focusing on year on year increases.
  4. Reinvest in the business through share buy backs.

Stick with the basics, and look to the brands long term historic performance - history has a habit of repeating itself, and with Coke the potential upside looks promising.

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Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am long CCL trading on the Australian Stock Exchange. This advice is general advice only. You should seek independent financial advice before making any investments of your own.