- Coca-Cola serves as a distribution toll bridge.
- Sparkling beverage volume increases flat lined at 1% in 2013 and have remained there since.
- Price increases and financial engineering should help boost the bottom line for the foreseeable future.
- Coca-Cola’s dividend remains safe for now.
- Coca-Cola shares are worth holding onto, for specific categories of investors.
According to the oft-quoted trade publication Beverage-Digest, last year represents the 10th straight year of carbonated soda volume declines in the United States. A number of investors in beverage giants such as Coca Cola (NYSE:KO) may worry that the company will morph into a liability in their portfolios. However, there are some pretty compelling reasons for shareholders to hang onto their Coca Cola shares.
Coca Cola's Distribution Toll Bridge
Coca-Cola makes and moves its syrup and finished bottling products throughout a vast global distribution network of 250 bottling partners. Also, Coca-Cola owns bottling facilities of its own. More importantly, other beverage companies such as Monster Beverage (NASDAQ:MNST) and Dr Pepper Snapple Group utilize Coca-Cola’s distribution network. This gives Coca-Cola a certain amount of leverage over its competitors. In fact, Coca-Cola owns 16.7% of Monster Beverage’s stock.
The recent release of the Keurig Kold represents another interesting distribution set up. The Keurig Kold machine represents the product of a partnership arrangement between Keurig Green Mountain (NASDAQ:GMCR) and Coca-Cola. Coca-Cola purchased 16.1% of Keurig Green Mountain, contributing capital to develop the device. This should serve as a boost in the arm for Coca-Cola’s sparkling beverage volume.
However, Keurig Green Mountain recently hit a fundamental brick wall due to competitive pressures. This serves as an indication that consumers could possibly view Keurig machines as nothing more than a novelty. The positive incremental impact on Coca-Cola’s overall sparkling beverage volume will wane if consumers tire of Keurig Kold’s “newness”.
Financial Engineering Will Boost Top And Bottom Lines
Growth in Coca-Cola’s sparkling beverage volume flat lined to an anemic 1% in 2013 and hasn’t improved since (see table below). Coca-Cola will need to resort to different financial engineering tactics to keep expanding its fundamentals. One of the things that the company will need to do is raise prices. “Price/mix” expanded 2% so far in FY 2015. However, consumers will only tolerate this for a while. It will most likely erode sparkling beverage volume over the long-term.
|Coca-Cola Sparkling Volume Changes in %|
Source: SEC Filings
On Sept. 24, Coca-Cola announced the formation of the “National Product Supply System”, which will combine the resources of some of Coca-Cola’s U.S. bottling partners. Efficiency and cost reduction will represent the primary mission of this new entity. Also, this alliance will purchase bottling facilities from Coca-Cola Refreshments, the subsidiary of Coca-Cola. This will enable Coca-Cola to de-consolidate some overhead and reduce expenses and capital outlay in order to enhance net income and free cash flow and enable capital gains and future dividend increases.
Coca Cola Dividends
Coca-Cola steadily increased its free cash flow since 2011 by lowering its capital expenditures. Continued prudence with capital expenditures will help maintain Coca-Cola’s dividend and provide opportunities for small increases in the future. In 2014, Coca-Cola paid out 63% of its free cash flow in dividends, which resides a little in the high but tolerable range due to the mature nature of the company. Companies need to pay out more in dividends as they run out of room for expansion. Right now, Coca-Cola pays its shareholders $1.32 per share per year, translating into an annual yield of 3.2%.
Brand Remains Strong But Is Slipping Nonetheless
Coca-Cola’s brand remains strong in the minds of the consumer, meaning that it still serves as a draw. However, its brand perception is slipping in the face of the healthy lifestyles movement. Coca-Cola languished in the No. 3 spot on Interbrand’s 2015 brand ranking analysis. In the most recent quarter, brand Coca-Cola saw volume expansion of 1%. However, Sprite and Fanta saw volume expansions of 3% and 2%, respectively.
Coca-Cola shares aren’t for investors looking for vast amounts of growth. The healthy lifestyles movement will continue to put the skids on Coca-Cola’s sparkling volume growth. However, price increases, cost cutting and overhead reduction should provide some opportunity for small amounts of free cash flow gains and subsequent dividend increases and capital gains. Finally, retirement investors looking for dividend income may want to consider this company for the intermediate and long-term.