Coca-Cola: A Wise Or A Foolish Investment?

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

If you who are looking to invest in a company, then you may want to consider Warren Buffett's concept: investing in a solid company that you truly like. Mr. Buffett has owned Coca-Cola (NYSE:KO) stock since 1988 and this has become one of his largest Berkshire Hathaway (NYSE:BRK.B) holdings. The universal beverage titan continues to grow with over 3,500 beverages and over 500 brands in more than 200 countries around the world.

With this fact, many potential investors believe that Coca-Cola can give them an extremely high return on equity or ROE. This means that the money you invest can gain a return that is larger than the industry standard. Coke's return is estimated to be almost 20% higher than the other beverage companies as their stock dividend continues to increase every year for the past 50 years.

Global Appeal

Coca-Cola has been a huge part of the American culture and even in other parts of the world. Despite the growing popularity of other drinks - such as coffee from that famous coffeehouse chain, sports drinks, and fruit smoothie for the health conscious - Coke has matured along with the consumers. This is why it still grabs approximately $48 billion of sales in 2012. Earlier this year, the Atlanta-based company put forth their first quarter earnings where an increase in sales in the European continent was displayed.

The soft drink giant has realized that the public has become more diet-conscious than ever particularly since it has been banned along with other sugary drinks by First Lady Michelle Obama and Michael Bloomberg, New York City's Mayor. The ban therefore played a role in the drop of sales of carbonated drinks, allowing non-carbonated beverages to soar in sales. As this remains to happen, Coca-Cola has already completed its purchase of Honest Tea, a product generally found in health food stores, back in 2011. In addition, Coca-Cola has realized that sugary carbonated drinks needed some overhaul where Sprite, one of Coke's brands, now has 30% lower calories.

Supporting the Idea of Investing in Coca-Cola

Earlier this year, Coke announced a generous increase in its dividend from 25.5 cents to 28 cents for every share. With this new dividend comes a new yield which is approximately 2.8% per year. This means that Coca-Cola has effectively increased its dividend for 51 years straight.

On the other hand, the company has a total of more than $7.8 billion of free cash flow in 2012. This just shows that Coca-Cola has indeed a solid position which therefore allows it to return high value to the shareholders by means of share buybacks. In total, Coke has over $3.1 billion of repurchased shares in 2012 with up to $3.5 billion in shares this year.

If you take a look at the company's performance on stock charts for the last four years, Coke has a solid uptrend even though there are highs and lows. With proper management of the investor's position, it is easy to say that there is not much to lose with Coke despite the market's decline.

Why There are Still Unwilling Investors

According to those who are against the idea of investing in Coke, this is a poor investment with a poor total return especially for people like Warren Buffett. Coke stock has a total of 33% in returns since June 1998. Although this is so much better than losing investments, Coke represents an annualized return of less than 2%, making government bonds even more appealing.

Looking ahead of time, investors who do not want to buy Coca-Cola say that they do not think the next decade will be kinder to the company. This is in consideration of the bans and the Coke stock that trades at 20 times earnings.

However, the fact is that Coca-Cola has always been what it embodies - a valuable investment for those who are searching for appreciation that comes with a nice yield for long-term. Although KO had brighter days in the past 10 years or so, it will be unusual for the company to experience a great fall in its stock price.

Coca-Cola still continues to produce substantial cash flow thanks to its mega brands. A huge plus is that the company has already invested heavily in frontier and emerging markets. Therefore, it is still a wise move to invest in KO as the company will most likely get back on track, allowing the shareholders to earn huge rewards once again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.