Coca-Cola: Keeping Investors Smiling

May.25.12 | About: The Coca-Cola (KO)

Many things have been said about Coca-Cola (NYSE:KO) over the years. I have seen and read through countless articles about Coke. The most entertaining article was about a law suit from an individual that bought an old stock certificate at a garage sale and traced it through the historical mergers and acquisitions and convinced himself that he had just purchased millions of shares of Coke. (read about it here)

What new stuff can I tell you about Coke? Have you tried a lime with your Diet Coke? You should, it's great. The other thing that is really great is finding rock solid center pieces for client portfolios. When I design an income account for a client I rely heavily on a group of companies that will make me look smart year after year. Coke is one of those companies.

Coke has sales all over the world and almost as important as those sales is the fact that it has a vastly geographically diverse manufacturing base. New plants have been announced in Brazil, and Somaliland, in just the last few months. This is a good thing for long-term sustainability of the business. A very physically heavy, low-tech product is better produced with geographically logistic advantage. The higher the complexity of a product (think iPad) the more sense it makes to mass produce in fewer areas. Coke is not complex; it just tastes good and is heavy.

Coke sales by geographic region shown below from Capital IQ.

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There is no doubt that Coke is growing.

The Dividend Monk has a great article on Coke's growth (here). Read that article I linked to from the Monk for some solid numbers. For this discussion let's just say that these guys are doing a good job with business scale, product development (branding) and sales. Turning those three things into growth does not happen automatically, which brings us to the next point.

Coke is a well managed shareholder-centric company. Large shareholders like Berkshire-Hathaway (holding 200 million shares reported March 30th, 2012) have held shares over time and are well seated on the board. Richard Daley is also on the board for Coke and if you can handle being Mayor of Chicago for 22 years then my hat is off to you. This group of directors and executives has shepherded Coke to a 10-year run of stable profit margins with some sizable revenue growth. (see charts below) It is easy to be impressed by that if you have ever tried to grow a business. Size has a way of shrinking profit margin.

Coke 10-Year Profit Margin Chart

(charts from ycharts.com)

(click to enlarge)Coca-Cola Profit Margin 10-year ChartClick to enlarge

Coke 10-Year Revenue Chart

(click to enlarge)Coca-Cola 10-Year Rev ChartClick to enlarge

Let's not look at the performance of these managers in a vacuum, let's look at Pepsi's (NYSE:PEP) numbers as well and compare the Coke managerial ability to grow and produce profits to Pepsi's ability to do the same. Yes, it's Coke vs. Pepsi but stay with me - this is important.

Pepsi 10-Year Profit Margin Chart

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Pepsi 10-Year Revenue Chart

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We see here clearly, but not severely, that growth can impact profit margins. Businesses are not operating inside some charts on a web page, but my point is that all growth is not created equal and management is the difference in most cases.

We should mention that Coke is a reliable dividend-paying stock. It is currently showing a payout ratio of 51% (data from Yahoo Finance and others). History tells us that as Coke grows so will these dividends. An investment with the high certainty level that Coke has in the elevation of shareholder income will cause those shares to trade at some current premium to that higher future income. You see that reflected in the relatively low yield of 2.7%.

In conclusion I strongly recommend Coke as a center piece to an income portfolio. Profit growth, strong management, and sustainable dividend police are in place and have been in place for years. Many markets are still waiting for Coca-Cola to flex it muscles and show us more good business. Is it a buy-and-hold forever? No, but the value is solid, buy and add on dips.

I am long Coca-Cola .

Disclosure: I am long KO.