Why Investors Ought to Stick With Coke

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coco-Cola (NYSE: KO) lost some of its fizz with—er—flat second quarter earnings, but shares are still a solid and lucrative long-term investment.

The world’s largest beverage maker earned $2.68 billion, or $0.59 per share, down from $2.79 billion, or $0.61 per share, in the same period a year ago. Stripping out one-time items, the company earned $0.63 per share in the second quarter, right in line with Wall Street estimates. Revenue dropped to $12.75 billion, shy of the $12.95 billion analysts anticipated.

The Atlanta, Georgia based beverage behemoth reported global volume rose 1% in the period. But in its cash-cow North American market, volume slipped 1%, including a 4% dip in sodas. A slippage in soda sales in nothing new; the figure has fallen in four of the last five quarters.

Challenging economic conditions in China, changing tastes and bad weather in emerging market countries like India were cited for the weak volume growth. Inclement weather is typically faulted for feeble retail sales, not beverages. However, India’s monsoons crushed sales, especially when compared to the explosive growth rate from the region a year ago thanks to a late monsoon season. Meanwhile, consumer spending in Brazil, usually a bright spot for sales, was crimped by a credit crunch. 

“This was a confluence of events,” CEO Muhtar Kent said in a conference call. “The portfolio effect of our global business did not work in our favor in this particular case.” As a result, Coke is stepping up efforts in China and other emerging markets to expand Coke’s reach by adding more affordable, smaller package sizes.

More importantly, Kent added, “This is more of an anomaly; we should not see this as a trend or systemic issue.”

Still the soda leader

One trend that cannot be ignored is that consumers are swapping sodas for more bottled water, sports drinks, energy beverages and juices. Sales of carbonated soft drinks (sodas) in the U.S. fell for an eight straight year, posting the largest yearly drop since 2009, according to the annual report on soft drink sales by Beverage Digest.

The March report revealed volume fell by 2.5% for Pepsi (NYSE: PEP), 1% for Coke and 0.5% for Dr. Pepper Snapple (NYSE: DPS). Amid growing cries from nutritionists that sugary sodas are to be blamed for the nation’s expanding waistlines and growing obesity epidemic, soft drinks sales have been in a steady decline since 2005.

But Coca-Cola still claims 42% of the soft drink market, compared with 28.1% for Pepsi and 16.8% for Dr. Pepper. Among soft drink brands, Coke is tops with a 17% market share. Diet Coke is No. 2 at 9.4%. Taking the No. 3 slot is Pepsi with 8.9%. Mountain Dew, a Pepsi product, is No. 4. Rounding out the top five is Dr. Pepper.

While Pepsi plays second fiddle in the Cola wars, the company remains a global leader in the beverage and food market. Its diverse portfolio of 22 brands runs the gamut from Pepsi to Aquafina to Tropicana to Lipton to Quaker Oats to Fritos to Cheetos. Each generates more than $1 billion in annual retail sales.

The company got off to a great start in 2013 with core earnings of $0.77 per share, a 12% increase in organic revenue growth of 4.4%. Focused on improving productivity in every operating sector, the company remains committed to creating “long-term value to shareholders." Shares are trading at a 52-week high and yield a very satisfying 2.7%. Expectations are for Pepsi’s revenue to increase 2% in the second quarter to $16.8 billion and EPS to rise from $1.12 to $1.19.

Dr. Pepper is the fifth largest soft drink seller with a 6.5% market share. The soda has a very distinct taste and enjoys a staunch and loyal following. Hailed as the oldest popular soft drink, the company also owns Snapple. First quarter EPS increased 15.22% to $0.53, up from $0.46 in the year ago quarter. Revenue rose 1.32% to $1.38 billion. A commendable showing and perhaps tough act to follow. Second quarter earnings are projected to be flat at $0.85 per share.

Cheers to Coke’s dividend history

Income thirsty investors find Coke’s dividend history appetizing indeed. The company has paid a quarterly dividend since 1920, and has increased its dividend in each of the last 50 years.

Berkshire Hathaway’s chief, Warren Buffett, is a big fan. The investment guru, considered the greatest investor of all time, owns 400 million shares of Coke. It is the Oracle of Omaha’s largest holding at 20.1% of his expansive portfolio. Buffett maintains he will never sell a single share of the soda giant. “I like to bet on sure things,” Buffett said of his Coke investment.

Given the choice, I’ll drink a Diet-Pepsi over a Coke. But, since I too like to bet on sure things when it comes to investing, I’m betting on Coke as a top investment choice for long-term goal oriented investors.  

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Diane Alter has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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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