The Coca-Cola Company (NYSE:KO), which is a major player in the non-alcoholic sparkling and still beverages production and bottling segment, has been in the news for its major operational restructuring lately. This restructuring is expected to boost refranchising to its bottling partners and help improve growth overall. This is significant since the carbonated beverages sector, which is the bread and butter of the Coca-Cola Company, is past its prime. It is by no means certain that Coca-Cola's diversification into healthier options would allow it to cash in on the shift away from carbonated drinks. However, KO possesses a sound balance sheet and a decent dividends record, both of which indicate that the beverage giant is on a firm financial ground. A slowdown is expected, but fears of a major crisis are perhaps unwarranted and Coca-Cola's restructuring may actually help it emerge stronger than the competition.
Coca-Cola Announces Major Restructuring of its American Business
According to a recent announcement, KO will be segregated into two entities, namely Coca-Cola North America and Coca-Cola Refreshments. The latter will handle the bottling operations of the beverage giant, while the former will handle other core businesses and subsidiary segments. Coca- Cola Refreshments will from now on be considered part of the Bottling Investments Group (BIG). This move is expected to catalyze the process of refranchisement to bottling partners in the US. This move is expected to boost growth and help offset the slowdown in the Carbonated Soft Drinks (CSD) segment.
Market headwinds and its impact
The slowdown is a natural result of the increasing health consciousness in the US, which has resulted in consumers moving away from carbonated drinks which form the core of Coca-Cola's business. The company has since tried to diversify into healthier alternatives, as well as non beverage categories. Even then, 11 of Coca-Cola's 16 businesses are beverage based, and the beverage giant faces strong competition from the likes of Poland Springs and Gatorade in the health drinks segment.
Further, Coca-Cola's operations are highly international in nature, which means that its revenues are subject to massive currency rate fluctuations. Despite the company's global volumes growing by 2%, its revenues fell 3% YoY. With the Federal Reserve looking more confident and the European Central Bank less and less so, Coca-Cola's global exposure is likely to be a liability in the near future.
Balance Sheet and Dividend History
YTD free cash flow
Cash and Short-Term Investments
Cash + ST Inv. to SE
Long-term debt-to-equity ratio
Dr Pepper Snapple
(Source: SEC filings)
As the above chart shows, Coca-Cola's free cash flow is the highest among its peers, as are its short term investments. On the other hand, it has a relatively low long term debt-to-equity ratio. Combined together, they indicate that the company can easily handle its dividend requirements while continuing to expand vigorously.
Coca-Cola has maintained a consistent dividend growth over the years. It is likely to increase the dividend for next year to $0.30, and is expected to maintain that rate going forward. Further increases, however, would likely be slower than before.
In the News
Pepsi Co. (PEP) recently stole some business, signing a deal to replace Coke at all Buffalo Wild Wings (BWLD) locations. It was also recently announced that Coke will be eliminating around 750 jobs in the US. On the brighter side, business in China is still doing very well. Coke recently announced a $4 billion investment in a bottling factory in China.
The Often Overlooked
The common discussion points for Coke is that they have over 3,500 products, 16 brands valued at over a $1 billion, and have products available in over 200 countries. What is often not discussed are some of the risk factors many people do not think of. Water scarcity is listed as the number two risk factor in Coca Cola's annual report. Water is the main ingredient in producing many of Coke's products. Overexploitation, water pollution, poor management, and climate change could all negatively impact its ability to manufacture products. Increasing production costs or capacity constraints would be an unfavorable result of this issue.
There is also the possibility of increased regulation and laws against carbonated drinks like Coke. New York City has already put forth legislation to ban sugary drinks over 16 ounces, and other places could follow suit. The possibility of bans or increased regulation on many of Coke's products could have a huge impact on their financial performance. There are several wild cards that could potentially come into play for Coke that could end up being very unfavorable for the company.
As the above analysis shows, Coca-Cola's restructuring is likely to help it to some extent, but it cannot be denied that it functions in a slowing market and is exposed to international currency fluctuations. However, it possesses a sound balance sheet and its dividend growth is likely to continue in the next year, though beyond that, slowdown is expected. On the whole, this points to "hold" being the best option for the investor who already has bought into Coca-Cola's stock, while the investor seeking long term growth may be advised to explore other alternatives.