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      Investing in Coca Cola: A Compelling Case

      By Wasim Omar

      Published on

      December 22, 2023

      1:24 PM UTC

      Investing in Coca Cola: A Compelling Case

      One prevailing characteristic of the stock market atmosphere is the notable level of unpredictability, even during favorable times. In such instances, Coca-Cola (KO) emerges as a symbol of steadiness and resilience.

      This piece delves into the case for investing in Coca-Cola, a beverage company with a worldwide presence in consumer markets that even navigated the turbulent waters of the COVID-19 pandemic.

      What makes investing in Coca-Cola so compelling among other US stocks is its robust protective barrier, a defense crafted through brand leadership, strategic commitments to brand upkeep, and an enduring duopoly with PepsiCo.

      Despite the entrance of a third competitor, Keurig Dr Pepper, Coca-Cola’s protective barrier remains intact.

      The company’s capacity to sustain profitability amid the widespread closures of bars, restaurants, and entertainment venues attests to its enduring robustness.

      Examining Coca-Cola’s global reach, resilient distribution network and reliable dividend disbursements reveals why this renowned beverage giant stands out as an appealing option for insightful investors in search of stability and enduring growth.

      Coca Cola Economics

      Given the sheer size of the Coca Cola enterprise, those interested in investing in Coca Cola must first understand the economics at play here.

      Coca-Cola’s business economics have undergone a strategic transformation, enhancing its appeal to investors.

      Over the past decade, the company strategically divested its bottling operations, shifting focus to its core business of producing and selling beverages and concentrates. This move proved astute as it propelled the return on invested capital (ROIC) from the high teens to the mid-20s.

      The divestment strategy not only streamlined operations but also lightened the balance sheet, making it more agile and efficient.

      Although the refranchising led to a temporary dip in revenues and earnings in 2018, Coca-Cola has since experienced a consistent uptrend. This resurgence can be attributed to both price increases and sustained volume growth.

      Remarkably, Coca-Cola’s Return on Equity (ROE) has surged to an impressive +40%. This remarkable increase stems from elevated relative debt levels and heightened profitability resulting from the aforementioned divestments.

      It’s noteworthy how these strategic maneuvers have positioned Coca-Cola as a leaner and more profitable entity.

      For investors eyeing the stock’s performance in the current year, understanding Coca-Cola’s transformed business economics is crucial.

      The leaner balance sheet and improved ROE indicate enhanced operational efficiency and profitability, factors that bode well for sustained growth and potentially robust stock performance.

      The Dividend King Status

      Beyond its iconic drinks, among the top reasons that many are drawn towards investing in Coca Cola is its status of being one of the most reliable dividend kings out there.

      Celebrating its 61st consecutive year of dividend increases in February, Coca-Cola stands as a formidable Dividend King.

      The sustainability of this streak is underscored by the company’s robust free cash flow payout ratio, resting comfortably at 51.4%.

      With $7.9 billion in free cash flow against $4.1 billion in dividends for the first three quarters of the year, Coca-Cola exhibits financial resilience, promising mid-single-digit annual dividend growth.

      What sets Coca-Cola apart is its 3.2% dividend yield, double that of the S&P 500 Index at 1.6%.

      Despite a slightly elevated 76% EPS payout ratio, still within the safe range for consumer staples, the company mitigates risk with a strong balance sheet boasting a 57% debt-to-capital ratio, below the ideal 65%.

      A credit rating of A+ from S&P, coupled with a mere 0.6% chance of not enduring till 2053, exemplifies Coca-Cola’s financial fortitude.

      Notably, the beverage giant is trading at a 5% discount to its historical fair value of $60 per share.

      The company’s dividend growth, hovering around 4-5%, aligns with a sustainable earnings growth strategy, further reinforcing Coca-Cola’s status as an enduring investment choice. This is especially appealing to those eyeing long-term gains.


      Of course, those who are serious about investing in Coca Cola would do well to keep the risks the company faces on the radar. While these are not serious yet, they do loom on the horizon, and could become troublesome if their trajectory is not slowed down:

      1. Impact of Weight Loss Drugs

        Coca-Cola faces a potential challenge from GLP-1 receptor antagonists like Eli Lilly’s Zepbound weight loss drug.

        These drugs, designed to curb appetite and thirst, may lead to a modest decline in demand for Coca-Cola’s products as obesity rates rise. Investors should monitor these shifting pharmaceutical interventions that affect consumer preferences.

      2. Vulnerability to Economic Downturns

        The company’s reliance on away-from-home consumption channels, such as restaurants and theme parks, exposes it to economic downturns.

        During a recession, consumer spending on leisure activities tends to contract, potentially affecting Coca-Cola’s short-term financial performance. Investors should factor in economic indicators when evaluating the stock’s resilience amid economic fluctuations.

      3. Cybersecurity Concerns

        Coca-Cola’s prominence makes it a prime target for cyber threats. A major hack could disrupt operations and compromise sensitive information, posing a risk to the company’s fundamentals.

        In an era where data breaches are increasingly common, investors should emphasize Coca-Cola’s cybersecurity measures and the potential financial fallout from a significant secure ty breach.

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