Coke Makes for a Safer Investment Than Treasuries

| About: The Coca-Cola (KO)

Today you can buy a 10-year Treasury bond and get a 3.11% yield - but wouldn't you rather own shares in a company that pays a better yield, and has the potential to increase in share price?

I usually try to find companies that benefit directly from higher commodity prices, but in this case, I've found a company that could benefit despite higher commodity prices.

This company pays a 3.4% dividend - and better yet it has the ability to raise or lower prices at will. That's because it takes one of the cheapest commodities on the planet (corn) and turns it into an easily consumable good - with a price markup in the triple digits. Whether you believe we're headed into deflation or inflation, pricing control is hugely important. More on this pricing control in a minute.

Most people buy Treasuries precisely because they want safety.

If you're worried about safety, I'd make the argument that buying shares of Coca-Cola (NYSE: KO) today is at least as safe as buying a 10 year Treasury. Whereas Coca-Cola has less than $12 billion in debt (about 1/3 of its total annual revenues), the U.S. Treasury has to fund something close to $13 trillion in the next 10 years, - which amounts to close to 80% of its revenues over that period - but that doesn't account for continued deficit spending.

You might make the argument that the U.S. Treasury can always have the Federal Reserve print more cash to meet its debt obligations, but Coke can do the same thing by issuing new shares. Both scenarios assume there are willing buyers of course.

Besides the massive debt obligations, Coke has something else that the Treasury can't boast: Coke's revenues are growing. According to The Wall Street Journal:

"Aggressive marketing during the World Cup gave Coca-Cola Co.'s namesake soda a boost in the second quarter, driving sales in markets from the U.S. to Brazil and pushing profit up 16%."

Meanwhile, U.S. tax revenues fell precipitously last year, and they haven't quite recovered, but that hasn't stopped Federal spending. The estimated deficit for 2010 is over $1.5 billion:

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So how is Coca-Cola able to control its pricing? As I said, their business model is based on taking corn, one of the cheapest and most readily available commodities on the planet, and turning it into an easily consumable product with a triple digit markup.

Corn costs approximately 6.5 cents per pound. Of course, Coca-Cola doesn't have raw kernels floating in its beverages. The company sweetens carbonated water with high fructose corn syrup, which currently costs about 26 cents per pound.

But those 26 cents let the firm manufacture approximately 10 bottles of Coca-Cola. So each bottle of Coca-Cola has less than 3 cents' worth of sweetener - but you'll pay at least $1.25 for a 16 ounce bottle.

The other inputs to the product (carbon dioxide, water, food coloring) are at least as cheap. The plastic bottle, at approximately 85 cents a pound, might be the most expensive part of the manufacturing process.

Of course, Coca-Cola also has to pay for distribution - but it's still somewhat vertically integrated. You might recall that Coke split off the bottling portion of its business into a separate corporation called Coca-Cola Bottling (NYSE: COKE). The bottling wing is still 31% owned by the manufacturing wing.

So, this company is still basically intact as the closest thing to a legal monopoly. I fully expect corn prices to rise, but it won't matter for Coke because they have the ability to raise prices at will. Corn syrup and other sugar prices could quadruple, and it might wipe out smaller players in the soda sector, but Coke won't be going anywhere.

Heck, the company puts plain water in a bottle (it owns Dasani), and people buy cases of the stuff.

Coke's one of those companies that's going to be around no matter what happens in the broad market. Like I wrote in my article on Budweiser (NYSE: BUD), you couldn't design a better company from scratch. Coke has worldwide brand recognition, fierce customer loyalty, great marketing, pricing power, and even a history of raising its dividend.

I mean, look at this chart showing the company's dividend growth going back to 1962:

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I love this company under $55, because you're locking in the dividend at more than a 3% yield; which is better than a 10-year Treasury. There's been strong support at the $50 level, but if you get a chance to buy this company at that price, I'd back up the truck.

The bottom line: corn is going to go up in price, and that will only help Coca-Cola.

Disclosure: None.

Originally published on July 21, 2010