Coca-Cola (KO) is the gold standard in the beverage industry.
The company is the largest seller of non-alcoholic beverages in the world.
Coca-Cola operates a tremendously strong business model. This is evident in their dividend history.
Coca-Cola is one of 18 businesses with 50+ years of consecutive dividend raises. Click here to download your free detailed Dividend Kings Excel Spreadsheet so you can see other businesses with strong and durable competitive advantages like Coca-Cola.
This level of dividend growth would not exist unless the company operated a recession resistant business model with distinct competitive advantages and a wide economic moat.
That being said, there are some that believe that Coca-Cola’s best days are behind it. Soda sales have dropped for 11 straight years. Fiscal 2015 fanned this flame, as investors watched total revenues fall 4% and operating profits drop by 10%.
In short, many believe that Coca-Cola is on the decline. This is not the case.
In fact, the company still has plenty of room to grow. The beverage industry is expected to increase by $300 billion between 2015 and 2020, and the company continues to hold dominant market share.
This article examines Coca-Cola’s growth potential and market share in detail.
Coca-Cola can trace its humble beginnings to Atlanta, Georgia, where the company’s first soda was created by John S. Pemberton to be sold at the small local pharmacy called Jacobs’ Pharmacy. The year was 1886.
In the first year, nine drinks per day were sold, a far cry from the operations of today’s company.
The company’s accountant, Frank Robinson, thought that the two ‘C’s would look well in advertising and named the product Coca-Cola. Mr. Robinson is also credited with creating the famous cursive Coca-Cola logo, which is still in use today.
Source: The History of Coca-Cola
The company rapidly began to grow, quickly surpassing many significant business milestones.
- 1887: The first use of coupons to purchase Coca-Cola
- 1898: Coca-Cola moved to their first independent headquarters, which they quickly outgrew. The company had to move to larger headquarters five times in the next twelve years.
- 1909: The Coca-Cola Bottler magazine begins publication
- 1930: The Coca-Cola Export Corporation was incorporated to help distribute and market the companyís product in international markets
- 1936: Coca-Cola celebrates its 50th anniversary
Fast forward to today, and Coca-Cola is a true giant in the beverage industry. With more than 130 years of serving customers, the company has scaled up to an impressive size. Almost 22,000 Coca-Cola beverages are consumed every second.
Here are a few other statistics on the company’s massive scale:
- Products sold in more than 200 countries
- More than 1.9 billion daily servings of Coca-Cola products
- $44 billion of net operating revenues
- $7.4 billion of net income
- $176 billion market capitalization (as of January 12, 2016)
Source: Coca-Cola Investor Relations
As Coca-Cola has grown, so has their product lineup.
Although Coca-Cola has the third most valuable brand valued at $73 billion in the world according to Interbrand, they own many other products that have been developed internally or through acquisition.
Many people are surprised to learn that many of their favorite drinks are owned by the Coca-Cola company, even if they do not explicitly bear the Coca-Cola name.
Source: Coca-Cola Investor Relations
Coca-Cola now has 20 brands with over $1 billion per year in sales. This diverse product portfolio creates significant operational diversification, and insulates the company from any downturns in interest for any single one of their product.
These 20 $1 billion+ brands are:
- Minute Maid
- Minute Maid Pulpy
- Del Valle
- Glaceau Vitamin Water
- Diet Coke
- Coca-Cola Zero
- Georgia Coffee
- I LOHAS
- Bon Aqua
- Gold Peak
- Fuze Tea
Even better, 14 of these 20 brands are stills.
Still drinks (non-carbonated beverages such as water, juices, and teas) have been very popular in recent years because of growing concerns surrounding the health effects of sparkling products (often sugary sodas). The significant potential that exists in Coca-Cola’s portfolio of stills will be discussed in detail later in this article.
Coca-Cola’s broad portfolio of products has given the company a very diversified business model, which has handsomely rewarded investors. The company has generated significant free cash flow that has been returned to investors in a very shareholder-friendly manner.
In the past 5 reported fiscal years, more than $39 billion of capital has been returned to Coca-Cola’s investors through a combination of dividends and share repurchases. A breakdown is shown in the following slide.
Source: Coca-Cola Investor Presentation, slide 48
Coca-Cola is on pace to continue this trend, with an increased dividend in fiscal 2016 and more than $2 billion of share repurchases.
Historical Returns & Sources of Future Growth
Fundamentally, Coca-Cola has done a fantastic job at improving metrics that are commonly associated with business success.
Between 2000 and 2015, the company has grown earnings-per-share from $0.74 to $2.00, which is equivalent to a CAGR of 6.9%.
Looking back even further, Coca-Cola’s EPS in 1985 was $5.51. However, due to a series of stock splits, each shareholder of Coca-Cola stock in 1985 would effectively own 48 shares today. This means that 1985’s EPS measured in today’s number of shares would be $0.11 (which is $5.51 divided by 48). Doing the math, Coca-Cola has compounded EPS at a CAGR of 10.2%, a very high rate of earnings growth.
This growth in the underlying business has translated to phenomenal returns for Coca-Cola’s shareholders. Historically, the company has been a tremendous investment, delivering returns well in excess of the S&P 500 Index.
Source: Yahoo! Finance
Fortunately, Coca-Cola’s growth prospects are robust. The company’s future growth will largely be driven by three factors. The factors are:
- Organic Growth, driven by expansion of the beverage market and Coca-Cola’s stills portfolio
- Business Restructuring (Coca-Cola is divesting of its bottling operations)
- Penetration in International Markets
Each of these growth factors will be discussed in the next sections.
Organic Growth Prospects
With a declining industry backdrop, it might be difficult to identify organic growth prospects for Coca-Cola. However, they certainly exist, and are two-pronged in nature.
The first expected driver of Coca-Cola’s organic growth will be through the increased market penetration of the company’s stills portfolio.
Already, Coca-Cola’s strong set of assets ensures that consumers keep coming back to purchase more products. This is especially true for their sparkling products, but I have no doubt that the company can use their industry expertise to drive growth in stills.