Over the past few weeks, I've read several articles telling me to stay away from Coca-Cola (KO). In reading them, I've been asked several questions; Are you scared that there will be a backlash against beverage companies because of health concerns? Do you prefer the health-conscious attitude of Pepsi Co. (PEP) to the seemingly profit driven focus of KO? Was Coca-Cola's growth not as high as you had hoped? There are plenty of reasons to not invest in Coca-Cola, but as far as I'm concerned, if you're a dividend growth investor, they're all wrong. Let me explain.
Excess sugar and high fructose corn syrup can cause diabetes. They can also make you fat. Coke is a definite culprit. However, when have you ever seen someone grab a Coke, say, "hmm, I'd better not, for my health", and then put it back. When have you ever seen someone grab a pack of cigarettes and say the same thing? Altria Group (MO) is doing well and their products have been known to cause coronary heart disease, strokes, chronic lung diseases, lung cancer, etc. They even have a warning label on the box. For a short term investor, it would be foolish to think that any new study about the health effects of soda will have a negative impact on sales.
For the long term investor it would be even more foolish. Coca-Cola has known about the effects of their products for a while and has been successfully adapting. Yes, in fact some people do choose not to drink Coke because of the health risks. But they might choose Coke Zero, Dasani water or Diet Nestea instead. Wherever Coke is sold, so is a healthy alternative from Coca-Cola.
The Pepsi Challenge
There's nothing wrong with Pepsi. In fact, I prefer the subtle nuances of Diet Pepsi (my non-alcoholic drink of choice) to Diet Coke. When it comes to soda sales however, the two companies don't compare. In 2011, Coca-Cola brought in $28 billion from soda versus $12 billion from Pepsi. That year also saw Pepsi lose its spot as the no. 2 best selling soft drink - to Diet Coke. I could go on for a while, but I'll give you the article where I got my information from and let you do the research.
Something not mentioned in the article is how Yum! Brands (YUM) almost exclusively uses Pepsi products (a result of being created as a Pepsi spinoff). With the incredible growth YUM has been showing over the past few years, you would expect Pepsi to be swimming in cash. While the fast food connection certainly helps, it's apparently not enough, as Pepsi just reported a 3Q2012 net of $1.9 billion, versus $2 billion from a year earlier, a 4.9% drop. The company attributed it to beverage sales and unfavorable foreign exchange rates, however this didn't stop KO from having a 4% net gain versus 3Q2011. Coca-Cola also had a higher margin than a year before, meaning it's keeping more of the money it makes (which is especially good for dividends).
Let Me Take Some of Those Shares Off Your Hands
The most recent news is Coca-Cola's 500 million share buyback plan. This will begin when the current buyback plan, for $2.5-$3 billion, expires. This pales in comparison to the 500 million share buyback which is valued at around $18.7 billion at the stock's current price. Of course this isn't anything new for Coca-Cola investors who have been the subject of consistent buybacks for years.
I believe news of this latest buyback plan, along with the recent stagnation and downturn in the share price makes Coca-Cola a buy right now. While the dividend might not be too impressive at only a 2.73% yield, the payout ratio is at 52%, which I consider to be low for a company as established as Coca-Cola. In addition, the stock buyback will gradually reduce the number of shares, lowering this ratio and freeing up more cash for a higher dividend. The dividend has grown consistently in the past and there's no reason for it to not continue to grow.
So KO didn't beat earnings estimates. Big deal. There was year-over-year growth, and in my book, growth is growth, especially in a worldwide recession when you have a globally marketed product that's not a necessity for survival. Call me optimistic, but I'm impressed.
The Bottom Line
For the short term investor, this might not be your first choice, but KO isn't really known as a buy and sell stock. If you're a dividend growth investor, like me however, I don't know how you could go wrong with Coca-Cola right now. It's dominating its market, it seems to be recession proof and the number of outstanding shares is being reduced. If you have the time to let this grow in your portfolio, it would be a mistake to pass it up.
Thanks for reading my article! If you can come up with a good reason not to buy Coca-Cola as a long term investment, or you have something valuable to share, please leave a comment below. I try to respond to as many as I can, until they start getting really technical and I need to read a book to figure out what's being said.