Coca-Cola Is a Top 10 Stock

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In developing a list of "core" companies for an investment portfolio, it is important to focus on great businesses.  Whether it be a high flying growth company that is disrupting the world like Apple or a steady performer like Diageo, a number of the characteristics every investor should look for in a long term core holding are the same.  A great business has great management, financial discipline, a solid history of execution against competition and the ability to generate growth for the foreseeable future.  The proper mix of these traits will result in an investment that successfully beats the market; the case study for this thesis is the third largest holding in my portfolio and today's "top 10" stock: Coca-Cola (NYSE: KO).

125 Years of "Sharing Happiness"

Coca-Cola reflected on its 125 year history of "sharing happiness" during 2011; this history provides an important backdrop to how Coca-Cola evolved into what it is today.  Today, Coca-Cola has the most valuable brand in the world, estimated to be worth around $78 billion.  With almost two billion Coca-Cola products consumed daily across the globe, the company has built unparalleled brand awareness.   On this subject, Warren Buffett is famously quoted as saying “If you gave me $100 billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world,' I’d give it back to you and say it can’t be done.” 

While soft drinks may seem like a mature and even boring business, a look at Coca-Cola's revenue growth since 1990 demonstrates how successful the company has been: 

<img src="http://media.ycharts.com/charts/1c79fc404d42505a557fc95e19dd1fe7.png" />

This growth has translated into tremendous share performance over the same period of time:

<img src="http://media.ycharts.com/charts/64eb5d5eb4223ad4e8468779ce4065d5.png" />


When you factor in the $10.33 per share in dividends paid over that time, Coca-Cola has certainly managed to "share happiness" with shareholders as well as consumers.  

A Look At the Competition

While Coca-Cola is in a leadership position in the soft drink market across the globe, the company certainly faces competition.  The second-largest soft drink maker, Pepsico (NYSE: PEP), is Coca-Cola's largest and most direct competitor globally.  However, the competitive landscape is much broader.  Dr Pepper Snapple (NYSE: DPS) offers a large range of brands that compete directly with Coca-Cola's product mix.  More recently, upstart competition has come from energy drink maker Monster Beverage (NASDAQ: MNST) and even home beverage innovator SodaStream International (NASDAQ: SODA).  Here's a quick comparison of each company by the numbers:

<table> <tbody> <tr> <td> </td> <td><strong>KO</strong></td> <td><strong>PEP</strong></td> <td><strong>DPS</strong></td> <td><strong>MNST</strong></td> <td><strong>SODA</strong></td> </tr> <tr> <td>CAPS Rating</td> <td>5 stars</td> <td>4 stars</td> <td>4 stars</td> <td>3 stars</td> <td>2 stars</td> </tr> <tr> <td>Share Price</td> <td>$37.31</td> <td>$69.71</td> <td>$45.45</td> <td>$51.63 </td> <td>$40.46</td> </tr> <tr> <td>Market Cap (in billions)</td> <td>$167.6</td> <td>$108.0 </td> <td>$9.5 </td> <td>$8.8 </td> <td>$0.8 </td> </tr> <tr> <td>1 Year Stock Performance</td> <td>11.9%</td> <td>7.8% </td> <td>21.0% </td> <td>8.7% </td> <td>19.4% </td> </tr> <tr> <td>10 Year Stock Performance</td> <td>62.8%</td> <td>66.6% </td> <td>80.0%* </td> <td>19,107.6% </td> <td>26.9%** </td> </tr> <tr> <td>TTM Dividend Yield</td> <td>2.7%</td> <td>3.1% </td> <td>3.0%</td> <td>N/A </td> <td>N/A </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td>TTM Revenue</td> <td>$47.6</td> <td>$65.7 </td> <td>$6.0 </td> <td>$2.0 </td> <td>$0.4 </td> </tr> <tr> <td>TTM Operating Margin</td> <td>23.1%</td> <td>15.1% </td> <td>18.2% </td> <td>26.8% </td> <td>11.1% </td> </tr> <tr> <td>TTM Price / Earnings</td> <td>19.53</td> <td>18.60 </td> <td>15.55</td> <td>28.36 </td> <td>20.48 </td> </tr> <tr> <td>TTM Price / Sales</td> <td>3.52</td> <td>1.64 </td> <td>1.58% </td> <td>4.43 </td> <td>2.14 </td> </tr> <tr> <td>TTM Free Cash Flow Yield</td> <td>4.5%</td> <td>5.0% </td> <td>2.5% </td> <td>3.3% </td> <td>-3.3%*** </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td colspan="6">* Performance since IPO in 2008</td> </tr> <tr> <td colspan="6">** Performance since IPO in 2010</td> </tr> <tr> <td colspan="6">*** Based on 12/31/11 data</td> </tr> <tr> <td colspan="6">Source: Yahoo! Finance - 12/6/12     </td> </tr> </tbody> </table>


Each of these companies has a slightly different business model (e.g., Pepsico produces food under Lays, Doritos and other brand names), but the data above validates the reasonableness of Coca-Cola's share price compared to its peers.  The smaller players in the soft drink market, particularly those with differentiated products like SodaStream, may have the greatest potential for gains in the future.  However, if the goal is to find the stock most likely to beat the S&P 500 over the long term (10+ years), I believe that Coca-Cola will be able to replicate the historical performance in the chart above going forward.

A Look Into the Future

While the skeptics that challenged Warren Buffett's investment in Coca-Cola in the late 1980's have been proven wrong, the same bearish sentiment that the stock's performance will flatten due to lack of catalysts remains in the mindset of investors today.  Here are several reasons to expect Coca-Cola to continue to outperform the market:

  • Emerging Markets - Coca-Cola CEO Muhtar Kent recently pledged that the company and its bottlers will reach global revenues of $200 billion by 2020, which is double the revenues generated in 2010.  The primary manner in which Coca-Cola plans to achieve this ambitious target is through continued investment and expansion in emerging markets including China, India and Brazil.  As Zacks recently noted, Coca-Cola has invested $2 billion in India, has commenced a $4 billion investment plan in China and has also made other emerging market commitments such as a $300 million investment in Vietnam.  These investments will fuel further growth in Coca-Cola's already strong businesses in these countries.
     
  • Innovation - While Coca-Cola still thrives with its core brands and established markets, the company is not sitting still.  A fantastic example of Coca-Cola's continued innovation is the development of the Coca-Cola Freestyle machine.  By providing customers with over 100 options from a single machine, Coca-Cola Freestyle has been a huge success for Coca-Cola and their restaurant partners alike through both popularity with consumers and increased awareness of Coca-Cola's lesser-known brands.
     
  • Brand Portfolio - Coca-Cola has invested in expanding its brand portfolio to include sports drinks like Powerade, juices and smoothies by Odwalla, and many other brands that allow Coca-Cola to provide beverage options meeting every consumer's needs.
     
  • Share Repurchases - One of the many ways that Coca-Cola generates value for shareholders is through regular repurchases of shares.  Recently, the company announced the authorization to repurchase an additional 500 million shares, which translates into roughly $19 billion or just over 10% of the shares outstanding.
     
  • Dividend - No discussion of the investment thesis for Coca-Cola is complete without mention of the dividend.  Coca-Cola is proud to have paid quarterly dividends for the past 92 years; this dividend payout has increased in each of the past 50 years, earning Coca-Cola a spot on the elite list of dividend aristocrats.  With a payout ratio of around 50%, there is plenty of room for Coca-Cola to continue this trend of dividend increases along with continued investment in the business and repurchase of shares.

These growth drivers combined with Coca-Cola's unparalleled brand awareness and market position make Coca-Cola the very definition of a core, long-term holding.  The company so clearly fits this label that it should be considered as a candidate for anyone's portfolio, whether it be for income-generating purposes for a retired investor or a young investor looking to grow wealth over the next 30 years.


BrewCrewFool owns shares of The Coca-Cola Company and SodaStream. The Motley Fool owns shares of Monster Beverage, PepsiCo, and SodaStream. Motley Fool newsletter services recommend The Coca-Cola Company, Monster Beverage, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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