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Keurig Kold: Down But Not Out For Coca-Cola

|Includes: The Coca-Cola Company (KO)

As seen on Stockdissector.com

On June 7, it was reported that the Keurig Kold machine will come to a disappointing end. Customers will receive a refund for their machines because the pods will no longer be available. Coca-Cola (NYSE: KO) loses a much needed avenue of distribution for its products as it faces headwinds from the healthy lifestyles movement.

Carbonated soda demand volume has fallen steadily since 2004. Coca-Cola needed all the help it could get. However, it wasn't a total loss for Coca-Cola nor is the concept totally dead. Let's examine what happened and what the future holds for making cold soda beverages at home.

High prices

Keurig and Coca-Cola quickly discovered that consumers didn't want to pay $300 plus for a machine that makes something easily purchased at the local grocery or convenience store at a much lower cost. In contrast, Keurig's rival SodaStream (NASDAQ: SODA) sells machines that dispense similar beverages for less than $200, according to CNN.

Retailers stopped carrying the Keurig Kold machine in April. I believe the final consumer viewed the machine as an expensive novelty unworthy of their hard earned dollars. I can't say that I blame them. Why would they pay for an expensive machine that dispenses a beverage that could harm their health over the long-term?

Not giving up

The good news for the shareholders of Coca-Cola, and the owners of Keurig, is that they are not giving up on the home brewing market. Both companies hinted that they learned from the partnership. Hopefully, the two companies will go back to the drawing board and design a cheaper system. Perhaps Coca-Cola could come up with some brands and beverages that are exclusive to a future machine?

CNN reports that Coca-Cola came away with a $25 million consolation prize when JAB Holding bought its equity stake as Keurig went private earlier in 2016. This represents a drop in the bucket compared to the $1.5 billion net income registered by Coca-Cola in the most recent quarter.

What does this mean for Coca-Cola?

This means that Coca-Cola and its shareholders lost a means for carbonated soda volume expansion, at least for the time being. On the one hand, pursuing this initiative could have actually hurt Coca-Cola's brand at the current price point. I don't think this represents a crippling blow to Coca-Cola in and of itself. Coca-Cola still remains the No. 1 beverage company in the world. Coca-Cola can still pull the pricing lever and research new products and packaging methods as well as cost cutting measures to maximize shareholder value.

Other challenges at Coca-Cola

Coca-Cola isn't without its share of challenges, such as muted volume in carbonated beverage growth and the strong dollar. Last year, the company saw its reported revenue and free cash flow decline 4% YOY. As a mature company, Coca-Cola resorts to financial engineering tactics, such as selling bottling assets, in an effort to lower overhead and increase margins. In the most recent quarter, Coca-Cola's long-term debt equated to 107% of stockholder's equity. I like to see companies with long-term debt at 50% or less of stockholder's equity.

Conclusion

I still think the company deserves a spot in your portfolio as a dividend holding. Last year Coca-Cola paid out 71% of its free cash flow in dividends, which is acceptable for a mature company. Coca-Cola demonstrates an ability to consistently increase its dividends. In February, Coca-Cola increased its dividend for the 54th consecutive year. Currently, the company pays its shareholders $1.40 per share per year translating into a yield of 3%. Coca-Cola's P/E ratio of 28 versus 24 for the S&P 500 makes the company a little pricey. Investors may not want to commit too many of their investing dollars in Coca-Cola and could benefit from waiting for a price correction before adding shares.

Disclosure: I am/we are long KO.