The world’s largest beverage company sells non-alcoholic soft drinks in every country in the world except Cuba and North Korea. Last year the company raked in nearly$48 billion in revenue with 41% coming from the U.S. and 59% outside the country. This isn’t an American company, this is a global powerhouse.
Coca-Cola was founded in 1886 by a pharmacist from Atlanta, Georgia. He crafted the soda in a brass kettle in his backyard and started serving it to the public in a soda fountain at Jacob’s pharmacy. The first year Coca-Cola lost money ($50 in revenue and $70 expenses). Doctor John Pemberton sold his company the following year to businessman Asa Candler for $2,300. Thanks to good taste and aggressive marketing Asia Candler increased syrup sales 4000% between 1890 and 1900.
The popular story of old school Coca-Cola containing cocaine is true. The soft drink contained extracts of cocaine until 1905. So do you want a Coca-Cola Classic or a Coca-Cola CLASSIC? Well there is another popular aura around Coke - that only 2 people know the true recipe. Coca-Cole does not have a patient with expiration; instead they can keep the recipe a trade secret indefinitely. Some believe revealing this secret recipe protocol added a special public relations buzz to the product. In doing some research I did find something interesting – Coca Cola obviously does not contain cocaine anymore but it does contain F.E Coca. Fluid extract Coca comes from the same plant as the real stuff. Only one company has a legal permit from the DEA to import the decocainized flavor essence of the coca leaf into the U.S and that is Stephan Co.’s in New Jersey. How’s that for a moat?
Coke as a dividend growth investment
I am a proud dividend growth investor and Coca-Cola is a dividend growth Investor’s dream. Coca-Cola has increased its dividend every year for 51 straight years. Think about that. You own the business and you get paid more money to own the business… every… single… year. Have you ever bought a stock, rode it up and rode it down with nothing to show for? I am very partial to stocks that pay (rising) dividends. As an owner not only do I want to be payed for taking risk, but companies that pay solid dividends every year for 50+ years are less likely to Enron you with creative accounting or fraud. If they are paying you the owner 55% or so of the profits every year, then they are less likely to be stealing your money or rigging the accounting to boost stock price and cash out options at favorable prices to steal your money. Rising dividends every year equals less risk.
In 1997 Coca-Cola was earning $3.82 per share and paid a .28 dividend. In 2012 KO earned $10.74 per share with $1.02 in dividends. This is all after a tech bubble burst, housing bubble burst, and a “lost decade”. People still drink Coke, Sprite, Minute Maid, Powerade, Vitamin water, Dasani etc. Return on shareholder equity has been 25+% the last 10 years, 34% in 2003 and 27.5% last year.
Outside the box advantages
Coke is a play on globalization and globalization is Americanization. People drink their drinks almost everywhere on earth. You want to invest in a growing India? Well sales were up 8% last year in India, 8% in Russia and 18% in Thailand. You don’t need to buy an India company to invest in emerging markets, Coke is 59% international.
In my McDonald’s pitch I pointed out that Coca-Cola and McDonald’s are two of the most recognized American companies. When foreigners think of America, and America business, they think of Coca-Cola and McDonalds. There’s an advantage to that and there should be a price premium. You are a part owner and you own a piece of one of the best businesses in the world.
Have you seen Coke memorabilia lately? If you watch the History channel you’ll see Coke antiques go for top dollar on shows like American Pickers and Pawn stars. The public has a favorable opinion of Coke. You can’t say the same about insurance companies, oil companies, banks, Microsoft etc.
Trojan horse full of sugar water
Look at a country like Russia. If you want to buy a Toyota Corolla in Russia it costs about $30,000 instead of about $20,000 here in America. Why? Tariffs. They believe that by jacking up the price of Toyota Corollas they will save (I admit I don’t know their names) Russian car companies and Russian jobs at the expense of Russian consumers.
You’ve heard the protectionist rhetoric here too, “Buy American, don’t buy that junk made in China”. Other countries slap tariffs on products too or at least threatened to. Now how often do you hear people complain about a duopoly in the soft drink market? Soda is cheap, and Coke’s products are quite tasty. People complain about foreign “dumping” of cars, manufactured goods, and expensive products but how often do people complain of the soda market and threaten with tariffs? Being a cheap, likeable, small product, with everyone in the world as your market is a surprising advantage in flying under the radar. Broke governments want to slap tariffs on $20,000 cars, not $1 bottles of flavored sugar water.
Coke is at the same price it traded at in April of 1998. Coke actually peaked in 98’ as opposed to the rest of the market peaking in 2000. People forget but pundits thought the market was “high” in 96' - 98’ before going completely parabolic in 2000 led by Tech stocks. Coke had an average PE of 51.3 in 1998, the PE last year was 18.8. Coke’s average annual PE stabilized by 2003 and has been around 20 since then with growing earnings.
I wouldn’t really say that Coke is undervalued right now, maybe fairly valued or a little overvalued. I sold the stock in my Caps game but held onto my real life shares. I’m not building a portfolio for today, I am building a portfolio for the future and in the future Coke will be worth a lot more and provide good dividends along the way.