The fizzy drink company has made investors decent money over the years
Thursday 05 Dec 2019 Author: James Crux

Here’s a quick mental exercise. Think of the globe’s best known, most iconic brands and one name will stand out, namely Coca-Cola or ‘Coke’, the world’s most recognised soft drink.

Everyone knows it, but can you make money from it as an investor? We’ll take a look at the multiple ways you can get exposure and we reveal our top picks in this article.

SECRET RECIPE

Coca-Cola was born at a soda fountain in Atlanta, US, in 1886 and has since evolved into a global brand that has endured for more than 130 years. Studies have shown Coca-Cola is among the world’s most-admired and best-known trademarks; it has even been documented that Coca-Cola is the second-most widely understood term in the world after ‘okay’.

Intriguingly, the formula for making Coca-Cola remains the best kept secret in the world of food and drink, and the brand itself has provided a winning formula for patient portfolio builders down the years, including the world’s most revered investor, Warren Buffett.

Coca‑Cola was ranked the third most valuable global brand in Interbrand’s annual Best Global Brands study for four consecutive years. And according to Forbes’ World’s Most Valuable Brands ranking for 2019, Coca-Cola was the sixth most valuable brand on the list.

Only US tech titans Apple, Google, Microsoft, Amazon and Facebook were deemed more valuable, while Coca-Cola was comfortably in front of the next beverages brand on the list, arch-rival Pepsi trailing in its wake in 29th place.

NOT AN EASY RIDE

Confirmation of Coke’s enduring clout was also provided by the recent Brand Finance Food & Drink 2019 report, which showed Coca-Cola retains its position as the world’s most valuable soft drinks brand after recording a 19% year-on-year surge in brand value to $36.2bn.

Still the world’s most consumed soda, Coca-Cola further widened its lead with second-placed Pepsi suffering an 8% drop in brand value to $18.5bn.

Yet there’s no room for complacency, as David Haigh, Brand Finance’s CEO, pointed out: ‘The soft drinks sector is facing scrutiny like never before in the Western world. From high sugar content causing a stir, to the backlash over single-use plastic, brands are having to think fast to meet changing needs and circumstances. Although Coca-Cola always has its sheer volume of sales to rely on, the brand needs to evolve with society if it wants to maintain its dominance in the sector.’

INVESTING IN THE COCA-COLA EMPIRE

There are six ways to get investment exposure to the fizzy drink. First is New York-listed The Coca-Cola Company, shortened in this article to Coca-Cola, which manufactures and sells concentrates and syrups to its 300 bottling partners, while still owning the brands and holding sway over the brand marketing initiatives. Its shares are widely available on UK investment platforms.

On the UK stock market are two bottling partners, Coca-Cola HBC (CCH) and Coca-Cola European Partners (CCEP). These companies use the concentrates and syrups to make, package and distribute the finished soft drinks to customers, who then sell Coke to consumers.

There are two more botting businesses listed in the US called Coca-Cola Consolidated and Coca-Cola FEMSA. The latter is a Mexican business focused on Central and South America. 

A sixth option is Coca-Cola Bottlers Japan which trades on the Tokyo Stock Exchange although its shares are not widely available on UK investment platforms. The same applies to Australian-listed Coca-Cola Amatil which is a bottler for the Asia-Pacific region.

DO I JUST GO FOR THE PARENT COMPANY?

A £10,000 investment in Cola-Cola 20 years ago would now be worth £27,558 with all dividends reinvested. In comparison the same £10,000 over the same time period in the FTSE 100 index would be worth £22,666, showing how Coca-Cola has been a market-beating investment.

Dividends have been an important part of the total returns for investors and earlier this year Coca-Cola announced its 57th year in a row of annual dividend growth.

BELOVED BY BUFFETT

Perhaps the Coke brand’s most prominent admirer is Warren Buffett, the world’s most famous investor, whose Berkshire Hathaway vehicle is The Coca-Cola Company’s biggest shareholder with a 9.34% stake.

Buffett bought more than $1bn of Coca-Cola shares back in 1988, not long after the Black Monday market crash, and Coke has proved to be one of the Sage of Omaha’s all-time great investments.

He determined Coca-Cola’s iconic name and global reach had created a moat around its core soft drink, while his Coke investment marked a change in his approach from ‘buying bad companies at great prices’ to ‘buying great companies at good prices’.

Buffett had in fact spent decades observing Coke and what made it such a great business. As he described in his 1989 shareholder letter, the brand first made an impression on him in 1936 when he bought Cokes at the rate of six for 25 cents in order to sell for a small profit. ‘In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product,’ Buffett enthused.

He still characterises Coca-Cola as a ‘very good business’, but admits that the consumer backlash against sugary sodas is a bear point.

During a 2018 CNBC interview, Buffett said of Coca-Cola: ‘It doesn’t look as good as it did five or 10 years ago.’ While Coca-Cola has expanded into non-soda products including coffee and tea, they don’t generate such high margins as fizzy tipples do. However Buffett does say it has the best distribution system in the world, which should serve the company well as it expands into energy drinks and launches new products like Coca-Cola Plus Coffee to entice the next generation of consumers.

Despite this success for investors, Coca-Cola still has to work hard to prosper in the modern world and its shares are not cheap when looking at certain valuation metrics.

Fizzy drink consumption is reducing in developed markets due to the increase in health-conscious consumers and government-imposed taxes on sugar-laden products, although Coca-Cola is upping prices periodically to compensate for low volume growth.

As a major plastics polluter, Coca-Cola also risks drawing the ire of socially conscious, social media savvy millennials.

Health and wellness trends do present a long-term risk to Coca-Cola as consumers and governments seek to tackle obesity. Yet the company continually maintains relevance through updates to the flagship product and its variants.

For example, recent sales momentum is attributed to the success of low and no-sugar products, notably Coca-Cola Zero Sugar. This year also saw the launch of Coca-Cola Energy, another Coke variant with more energy-boosting characteristics and new taste.

And the company’s innovation strategy is not focused on the Coke brand alone. Coca-Cola is seeing significant market share growth of the Smartwater brand in India, the Authentic Tea House brand in China and Southeast Asia, Fuze Tea in Western Europe, and Chi which is a dairy and juice brand in West Africa.

ONE OF THE MANY BOTTLING COMPANIES

Coca-Cola Consolidated is the largest independent Coke bottler in the US, which kick-started 2019 by changing its name from Coca-Cola Bottling Co. Consolidated to its current snappier moniker.

The near-$2bn company makes, sells and distributes Coca-Cola products across 14 US states to 66m consumers, but it is so much more than a pure Coke play.

It also distributes drinks for various other beverage brands including Dr Pepper, Sundrop and Monster Energy and unique beverages such as the independently produced BodyArmor sports drink.

Although The Coca-Cola Company dominates the financial news headlines and calls the shots in terms of the core brand, the Coca-Cola mothership relies on standalone distributors like Coca-Cola Consolidated to get its drinks onto retail store shelves and into drinks dispensers around the globe.


THREE STOCKS TO BUY

The Coca-Cola Company – $53.95

SHARES SAYS: BUY

The Coca-Cola Company is one of the world’s most familiar businesses, but the investment case is much more than its eponymous brand, being a total beverage behemoth offering over 500 brands in more than 200 countries and territories.

Also a premium juice, organic tea and coconut water concern, Coca-Cola offers more than 800 beverages in the US alone including low and no calorie tipples. Brands include four of the world’s top five non-alcoholic sparkling drinks, namely Coca-Cola, Diet Coke, Sprite and Fanta, as well as some lesser-known names such as Dasani, Powerade and Minute Maid. It also owns two UK household names: coffee brand Costa and mixers brand Schweppes.

Sales have increased from $19.28bn in 1999 to a forecast $37.06bn for 2019.

With the consumption of carbonated drinks slowing in developed markets, Coca-Cola is restructuring its way to improved profitability under new CEO James Quincey.

Investment bank Morgan Stanley argues that Coca-Cola has stronger pricing power than peers which is also sustainable.

The beverages giant is constantly transforming its portfolio, either by reducing sugar in its drinks or by launching innovative new products. Under Quincey’s stewardship, there is also a major emphasis on reducing the company’s environmental impact by replenishing water and promoting recycling.

Third quarter results marked a ninth straight sales beat versus forecasts amid robust pricing and volume growth, although the company faces an adverse currency rates headwind.

Bulls point out that strong cash flows allow Coca-Cola to plough cash back into the business while funding higher dividends, share buybacks and acquisitions, although investors have to pay up to access its reliable earnings stream.

The shares trade on 23.9 times forecast earnings for 2020 and a 22.1-times multiple for fiscal 2021 according to Refinitiv.

Morgan Stanley believes the business can move to become a more nimble company and have a greater position in higher growth non-carbonated soft drinks. We share its enthusiasm and have a ‘buy’ rating on the stock.


Coca-Cola HBC – £26.02

The Coca-Cola Company stake: 23.3%

LIBERUM SAYS: BUY

With a premium listing on the London Stock Exchange and a secondary listing in Athens, FTSE 100 constituent Coca-Cola Hellenic Bottling Company is one of the world’s largest Coca-Cola bottlers and offers a play on lower per capita branded beverages consumption in emerging markets.

Coca-Cola HBC is the Coca-Cola franchisee for its territories, purchasing concentrate from The Coca-Cola Company to convert to finished products and receiving funds to help market Coke products.

A consumer products colossus with an annual sales volume of over 2bn unit cases, Coca-Cola HBC’s geographic footprint spans 28 countries in Central and Eastern Europe and Africa including high-potential markets such as Russia, Poland, Ukraine, the Czech Republic and Nigeria. Other markets include Ireland, Greece and Italy, meaning the company serves a population north of 600m.

Coca-Cola HBC’s non-alcoholic and ready-to-drink tipples span the sparkling, juice, water, sport, energy, plant-based beverages and ready-to-drink tea and coffee categories.

Churning out oodles of cash, the soft drinks leviathan is a progressive dividend payer with an eye for acquisitions; recent examples include Italian natural mineral water-to-adult sparkling beverages company Lurisia and Serbian confectionery brand Bambi.

Liberum Capital has a ‘buy’ rating for Coca-Cola HBC, insisting the business can deliver high-single digit earnings before interest and tax growth over the next five years.

Coca-Cola HBC trades on prospective price-to-earnings ratios of 19.5 for 2020 and 17.7 for 2021. Liberum expects Coca-Cola HBC to deliver rising free cash flow, pursue acquisitions and use special dividends when appropriate to maintain an efficient balance sheet.


Coca-Cola European Partners – €46.10

The Coca-Cola Company stake: 18.6%

SHARES SAYS: BUY

Created through 2016’s three-way merger of Coca-Cola Enterprises, Coca-Cola Iberian Partners and Coca-Cola Efrischungsgetranke, Uxbridge-headquartered Coca-Cola European Partners is the world’s largest Coca-Cola bottler by revenue.

It boasts leading market positions in 13 Western European nations including France, Germany, the UK and Spain, with a potential market of more than 300m consumers.

Coca-Cola trademark beverages represent more than 60% of total sales by category, but Coca-Cola European Partners’ total beverage strategy involves growing a portfolio of complementary sparkling flavoured soft drinks, energy drinks, ready-to-drink coffees and teas, waters, juice and plant-based beverages.

Coca-Cola European Partners’ competitive advantages include one of the largest fast-moving consumer goods sales forces in Europe. European giant Germany is Coca-Cola European Partners’ biggest single market at 20% of revenue and performance has been turned around since the 2016 merger.

Rising awareness of the harmful impact that single-use plastics have on the environment has catapulted plastic packaging to the top of the public agenda. Encouragingly, Coca-Cola European Partners was one of the first companies globally to make commitments to packaging and sustainability.

According to Liberum, Coca-Cola European Partners is ‘within striking distance of its goal of 100% recyclable packaging’ and offers scope for €1bn of annual share buybacks if bolt-on acquisitions don’t materialise. The business also has scope to be run more efficiently.

Prospective price-to-earnings multiples of 16.6 for 2020 and 15.5 for 2021 mean Coca-Cola European Partners is slightly cheaper than The Cola-Cola Company and Coca-Cola HBC.

 

 

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