Take water. Add sugar, a little carbon dioxide and some flavoring. Sell at a gigantic markup. It sounds almost too simple to work, and yet Atlanta-based Coca-Cola Co. (KO) has remained a staple of the Dow for decades, turning $9 billion in annual profits like clockwork and redefining the scope and magnitude of what a beverage manufacturer can be.
From Syrup to Bottle
But that’s actually an incomplete assessment of what the company does. For the most part, The Coca-Cola Co. (we’ll use the corporation’s “government name” throughout, avoiding confusion with the sweet black stuff it sells) doesn’t add the carbon dioxide, nor even start with the water. The company doesn’t make its namesake finished product, but rather just the syrup that serves as Coke’s indispensable ingredient. The Coca-Cola Company then sells that concentrate to bottlers around the world, who pay gladly for the opportunity to be the ones doing the more involved work of making the syrup drinkable and sellable to millions. Under exacting corporate standards, of course. The bottling of Coke is an industry unto itself, with several international bottlers being large corporations in their own right, even when under the auspices of a larger corporation. Not coincidentally, the Coca-Cola Co.'s largest North American bottler is a wholly owned subsidiary.
Nowhere to Go But Down?
Say you’re Coca-Cola Co. Chief Executive Officer Muhtar Kent, a lifer who assumed his current position since 2008. Given the reins of a company with a long history of making a ubiquitous product that’s known and enjoyed around the world, then what? Coke’s market saturation and brand recognition are close to 100%. There can’t be anywhere to go but down, right? The Coca-Cola Co. hasn’t been classified as a startup with growth potential for more than a century. Its stock is the bluest of blue chips, as venerable as it is valuable.
Indeed, The Coca-Cola Co. appears to be approaching the limits to expansion in most of its markets. The company divides the globe into five regions: in decreasing order of market size, those are Latin America, North America (effectively just the U.S. and Canada), Pacific (which includes China, India, and points south and east), Eurasia & Africa, and Europe (excluding Russia, which is part of Eurasia & Africa.) Worldwide growth was a mere 2% last year, which includes negligible growth in North America and shrinkage in Europe. Restrict the sales numbers to The Coca-Cola Co.’s sparkling beverage operations (as contrasted with its burgeoning but secondary category of still beverages), and growth is even more modest – 1% worldwide, and growing in only two of the five regions.
Looking Far and Wide For Growth
For The Coca-Cola Co., the phrase “emerging market” is no euphemism – it’s an apt description of Eurasia & Africa, where growth is enough to offset the inertia and contraction elsewhere. Growth is particularly pronounced in the Arab world, reaching double digits in North Africa and the Middle East, which are rare PepsiCo Inc. (PEP) strongholds. Still, 2014 was historic in that revenue and profit numbers diminished for The Coca-Cola Co. for the first time in this millennium.
As of late, historically speaking, The Coca-Cola Co. has downplayed tangible data in its investor communications. Perhaps that’s because the company has already accomplished all the financial goals a multinational could hope for, or maybe it’s due to the curious novel objectives of a 21st-century economy that sees “likes” and “follows” as currency. Either way, The Coca-Cola Co. chooses to pair news of its slowed growth with odd mentions of decidedly non-fiscal accomplishments. When an annual report is loaded with unquantifiable highlights (“we continued to build brand love and relevant consumer connections”), quantified but tangential ones (“package diversification helped us add more than a million new households to the Coca‑Cola brand”), and good old-fashioned obfuscation (“our superior franchise system, which continues to enhance execution capability across the continent by leveraging synergies and sharing best practices”), it might be a signal to be wary of the company’s future. Or it would be, if it weren’t for its tantalizing dividends.
Dividends: The Real Thing
Even though income was stagnant in the most recent fiscal year, The Coca-Cola Co. continues to offer some of the sweetest dividends around. Its annual dividend now stands at $1.22, translating to a 3% dividend yield, and this after a 2012 stock split. Shareholders received $8.5 billion last year from dividend payments and the company’s stock buyback program. The Coca-Cola Co. has raised its dividend every year since John F. Kennedy was president, and while that’s not the longest current streak in the stock market (that honor goes to Diebold Inc.(DBD) at 61 years and counting), it’s still a remarkable accomplishment that illustrates the company's consistent profitability.
The Bottom Line
The Coca-Cola Co. might be close to its growth apogee but you'll probably not have to walk more than a few steps anywhere in the world to see one of its products. That's something few – if any – companies can boast. Its ubiquity, paired with a very healthy dividend history, provide a strong incentive for shareholders to stay invested in a stock that remains among Wall Street’s most formidable.