Coca-Cola (KO) has made a lot of patient investors rich. It did not do so in any spectacular or revolutionary fashion, but through consistent growth and steady profitability. The world's largest non-alcoholic beverage company has helped to enrich many investors by regularly paying quarterly cash dividends for the last 92 years.
For 50 consecutive years, Coca-Cola has adeptly increased its quarterly cash dividends, which have benefited many of its shareholders. Adjusted for inflation, the company has delivered an annual average increase of 7.5% in its cash dividend payouts for the last five decades.
Furthermore, the company has even improved its annual increase in dividend payments by 8.6% since 2003. This impressive dividend income performance has made Coca-Cola a top favorite for dividend/growth-focused value investors.
Constant Drop in Soda Sales
However, this pattern of continuous dividend payment by Coca-Cola is now threatened by a decreasing consumption in carbonated drinks in the U.S., Europe and other developed countries. Despite a concentrated marketing effort, soda beverage producers like Coca-Cola and Pepsi (PEP) are suffering an incessant drop in sales in North America.
Fueled by health concerns, more Americans are shunning sweet soda drinks. Compared to 10 years ago, Americans are now consuming 40% less soft drinks by volume. This worrying downward trend in soda sales has a major impact to Coca-Cola, much more so than Pepsi, because it derives the majority of its North America revenue from Coke and Diet Coke sales.
As per the report of Beverage Digest, Coca-Cola is still the leader in carbonated soft drinks with a 42% share of the market, rival Pepsi has 28.1%, while Dr. Pepper has 16.8%. Brand-wise, Coke and Diet Coke are still the bestseller beverage drinks with respective 17% and 9.4% market share. Being the market leader, Coca-Cola is more vulnerable to the relentless decline of soda sales. It stands to lose more proportionate revenue from weaker sales.
Worse, politicians are already meddling, accusing that sugary drinks like Coke fuels obesity. Some U.S. cities like New York City have already passed legislation banning the sale of large (16 oz or bigger) cups of sugary soda drinks. Luckily, a judge issued a temporary restraining order stopping the implementation this anti-large cup soda law personally championed by Mayor Michael Bloomberg.
The temporary legal impediment does not remove the danger to Coca-Cola's bottom line. Once the government starts restricting, not merely regulating, your product, a company's growth potential is essentially shackled.
Overseas Market as New Growth Engine
Fortunately for stockholders of Coca-Cola, the management has a countermove to replace weaker North American sales. Coca-Cola, for the last decade, could only manage an average of 6% annual increase in sales mainly due to contracting sales figures in North America. The company is now aggressively spending more of its resources in expanding to other countries rather than wasting money on advertising at U.S. and North American markets.
Instead of wasting billions of dollars on TV ads in America, the company is now wisely investing the money in building more bottling factories in Asia, Latin America and Africa. Unlike the U.S. market, Coca-Cola is enjoying a healthy 9% in annual sales in China, already Coca-Cola's third largest market in terms of volume sales.
It was therefore smart for the company to build another bottling facility in that country. The opening of the 43rd bottling plant in Hebei Province last October 24 was personally attended by Coca-Cola's Chairman and CEO Muhtar Kent. He said the new $106 million plant is part of his company's 2012-2014 plan of investing $4 billion in its China operation.
Hebei province has a population of 72 million and the new plant will further increase Coca-Cola's already dominant position in that part of China. Unlike the U.S., the Chinese politicians are not yet passing any legislation restricting the sale of sweetened soda soft drinks.
Coca-Cola is also extending its operations in another billion-plus population country. The company has also started operating its 58th bottling facility in India's Chatta region. Coca-Cola management has officially said they plan to invest at least $5 billion more in its Indian operations' bottling and distribution chain.
If Indian and Chinese individuals can equal the 403 cans of Coke that Americans now consume each year, Coca-Cola has a very rosy future ahead. Right now Chinese consumers only drink an average of 38 cans. The company needs to spend more money advertising and promoting its products to the 1.5 billion Chinese.
Diversification for More Growth
Coca-Cola should learn from the current success of Pepsi. Its carbonated soft drinks now only account for 40% of its revenue. The Frito-Lay subsidiary of Pepsi makes the company less vulnerable to slow down in soda drinks sales. Coca-Cola ought to venture outside the soft drinks business and buy a few companies that will lessen its exposure to declining soda sales.
I am not saying the company should start wildly diversifying, buying Android tablet makers or phone makers like BlackBerry (BBRY). It can start purchasing companies that are complementary to its core soft drinks focus. Snacks, fast-food restaurants, and canned goods companies will go well with Coca-Cola. Hell, this soft drink company can also try buying some alcoholic-beverage companies. Beer drinkers are also Coke drinkers. As far as I know, moderate consumption of beer doesn't contribute to diabetes or obesity.
Coca-Cola's future lies in developing markets outside North America and Europe. It can also benefit from a more diversified line of income-generating products. Beer, coffee, tea, burgers, pizza, popcorn, sweet soda drinks, energy drinks, mineral water - anything that humans like to eat and drink should go well for Coca-Cola. I do confess that if only I'm the boss of this company, I will buy Cloud-based computing companies too.