Investors Should Know This About Coca-Cola

| About: The Coca-Cola (KO)


Coca-Cola's revenue and EPS numbers beat Street estimates.

Investors should look at the company's ballooning debt figure.

The beverage giant may have taken on $9b in additional debt to fund dividends and share repurchases.

The Coca-Cola Company (NYSE: KO) today announced its fourth-quarter and FY-2015 numbers, slightly exceeding industry estimates. Q4 EPS of $0.38 beat the estimate by $0.01 while the Q4 revenue of $10 billion was better by $90 million. But the stock has barely reacted to the outperformance, currently trading up only 0.52% at $42.87. Even the company's Accelerated Refranchising Plans have failed to provide an upward thrust.

Did the market have it all priced-in and that kept the stock from going down even as the broader markets sold off? Or are the investors worried about something?

First, let us discuss the stock's performance YTD and in the past 12 months. As Wall Street begins 2016 on a troubling note, investors took refuge in safe-haven stocks such as Coca-Cola which barely budged since the start of this year. The beverage giant currently trades down 0.7% YTD while the markets have sold off in the range of 8%-10% during the same period.

In the past 12 months, the stock has outperformed and given 3.9% in returns while the markets lost 8%.

So, one reason for today's inaction could be that since the stock did not drop during the downturn, investors more-or-less believe that the global scenario would not have a meaningful impact on the company's revenues and profits. However, the company in its latest results, has acknowledged the global headwinds and currency fluctuations as strong dampeners. Expectations of aggressive refranchising plans may have kept the stock afloat during turbulent times.

Second reason could be the huge jump in debt figures. For the year ended Dec. 2015, Coca-Cola's long-term debt surged to $28.41 billion, roughly 50 percent up from $19.06 billion a year ago.

The massive surge in debt is eating into company's profits. The interest expense for 2015 witnessed a 77 percent jump to $856 million. Although the figure looks relatively less when compared with the full-year net income of $7.35 billion, it makes for a strong comparison with the latest quarterly net income of $1.23 billion. Further increase in company's debt could see the interest expense consuming the entire quarterly profit in the near future.

I was intrigued by the rising debt in a decelerating environment, so I tried to match the numbers. Here is what I know:

Increase in the long-term debt: $28.41 - $19.06 = $9.04 billion.

Purchases of treasury stock + Dividends = $3.56 + $5.74 = $9.03 billion (see the image below). Coincidence?

So, if this is even somewhat true, this would mean that the beverage maker is taking on debt to service its share repurchases and dividend distributions. In February, the company is expected to announce an increase in its dividends, so that could mean more financial burden on the company.


I strongly believe that no business should take on additional burden to finance dividend payments, especially in a slowing environment. In fact, Coca-Cola should reduce the dividend payout, even if by a small margin, to aggressively push for cost-cutting measures in order to strengthen the balance sheet. However, investors should be informed if the company decides to scale back the dividend payments substantially.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Beverages - Soft Drinks, Earnings
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