Coca-Cola (KO) is continuously rated as one of the most valuable brands of all time. However, for owners of the stock, what is most exciting about Coke is the fact that the stock has returned attractive returns over the years, preserving purchasing power or in most cases increasing it substantially ahead of inflation. Coca-Cola is the world's largest beverage company, currently has a market cap of $168 billion and employs more than 146,200 people around the world.
Assume the following hypothetical scenario: It is 1970. Your grandparents have decided to start a trust fund for their future grandchildren so that when they grow up they have no financial constraints for day to day expenses. The sole purpose of this investment vehicle set-up by your grandparents is that you, as their grandchild, can spend your time as an adult doing what you love, pursuing a challenging career, or simply traveling the world learning multiple languages without having to worry about paying the bills next month. So, in the summer of 1970 your grandparents perform some due diligence and realize Coca-Cola stock is reasonably priced in addition to having good future growth potential. They invest $15,000 and purchase 211 shares of Coca-cola stock at $71 per share. In addition, it was explicitly specified that all dividends be re-invested back in the Coke stock. Of course your grandparents are financially literate and thus tactically place the shares in a tax-sheltered trust for you to access when you become a responsible adult.
Fast forward to today - you are now a responsible adult and gain access to the trust your lovely grandparents set up for you the year PBS begins broadcasting. You anxiously inquire, "What is the total value of the trust?"
Coca-Cola has had multiple stock splits, including the most recent in August 2012. With stock splits and dividends re-invested your initial 211 shares turned into 22,448 shares. At the current share price of around $37.4 your trust portfolio would have a market value of over $839,555. In addition, you would continue to receive a quarterly check of about $5,724 in dividends, which are re-invested in more Coca-Cola stock, continuing to increase the value of the trust your grandparents created for you over four decades ago. As an adult you would probably have the option to stop re-investing the dividend checks and instead use that cash to invest in other companies, take a family vacation, or whatever you feel is the best use for your cash. In a couple of years you would have a million dollar trust that you live off of during retirement or simply pass it on to your children. Just think about it. You do not have to worry about your living expenses during retirement thanks to a one-time intelligent investment made by your grandparents. They did not put any hard manual labor every year to increase the value of your trust. It's like planting an orange tree once to enjoy oranges for many years to come, but instead of fruits you have financial freedom.
Back to Coke: management continues to drive shareholder value year over year by taking the necessary steps to increase investor's purchasing power ahead of inflation. For example, the stock has a record of increasing dividend payments each passing year. In addition, over the last three decades management has kept a return on equity above 30 percent every year, with the exception of 2008 and 2009.
I think Coke is reasonably priced with an earnings yield of 5.05%, much greater than current bond yields, and a dividend yield of 2.73%. Competitors Pepsi (PEP) and Dr. Pepper (DPS) have earning yields of 5.24% and 6.22%, respectively. Both Pepsi and Dr. Pepper have a dividend yield of 3 percent. Although I believe these competitors are reasonably priced as well I prefer Coke because management is much more efficient in running operations, its solid market position, and its history of increasing shareholder value over the long-term.
As with any investment, there are inherent risks you automatically espouse when investing in stocks. The following downside risks going forward may hamper the growth of your investment:
Health and government officials are highly concerned some Coke's products cause obesity and thus may pressure the company to be more transparent about the ingredients they use. This can hurt Coca-Cola's reputation of bringing consumers "happiness," which can reduce demand for some of their products. Water around the world is becoming scarce and the quality of available water has been deteriorating. Since water is the main ingredient in most of the company's products, they could incur substantially higher production costs or even production constraints, causing a negative impact to the bottom line and your portfolio returns. Other factors to keep in mind are exchange rate fluctuations, increased competition, and management's inability to expand operations in developing and emerging markets.
Yet, I believe Coke is a good investment long-term if the stock is purchased when reasonably priced in addition to being a good vehicle to preserve and increase the purchasing power of your hard earned cash. Learning from the hypothetical example above, how about starting a tradition of setting up trusts for your future grandchildren and giving them financial independence for a better and brighter future? The ball is in your hands.