Things go better for Coke

Coca-Cola is expected to earn more in 2019. It’s making investments outside its declining soft drink business that should pay off for years. Buy for gains and dividends.

We regularly review Atlanta-based The Coca-Cola Company (NYSE—KO), or Coke. Since we published our March 8 issue, this consumer goods stock has advanced by 15.1 per cent. This gives the shares upwards price momentum. The company’s revenues are growing and this should drive up earnings next year. Coke has raised its dividend for 57 years in a row. The dividend yields an attractive 3.1 per cent. While the shares are costly, they remain a buy for patient investors seeking further long-term share price gains plus appealing and growing dividends.

Long-term share price gains and growing dividends are two of the things that are better about Coke.

Coke is the world’s largest non-alcoholic beverage company. It markets over 500 beverage brands through a network of company-owned and independent bottlers, distributors, wholesalers and retailers. Major company-licensed brands include Coca-Cola, Diet Coke, Minute Maid, Sprite, Fanta, Fresca, Dasani, Glacéau Vitaminwater and Powerade.

Coke generated 64 per cent of last year’s sales outside of the US. This raises its safety because no market other than the US accounts for a large percentage of its sales. Then again, ‘tariff man’ Trump’s trade wars could hurt some overseas sales.

Coke is responding to changing markets

The soft drinks that Coke markets have gradually fallen out of favour. Critics of the industry say that soft drinks contribute to the ‘epidemic’ of diabetes in heavier adolescents and children. As wealthier societies age, demand for sugary drinks declines. Indeed, Coke’s sales peaked at US$48 billion in 2012. Its sales have fallen every year since. By last year, Coke’s sales had fallen to $31.9 billion.

Coke is responding to market shifts. Chief executive officer James Quincey said: “Constant innovation is crucial for sustained growth.” Sales of Coca-Cola Zero Sugar, for example, grew by double digits for the sixth quarter in a row. As another example, Coke paid $5.1 billion to acquire Costa Coffee. This company operates coffee shops and self-service coffee machines. It generates most of its revenue in the United Kingdom. Coke launched Costa ready-to-drink products in the second quarter of 2018.

This year, Coke will introduce Coca-Cola Coffee to more than 25 markets worldwide following successful market testing in Asia.

Such initiatives will take time to pay off. That’s why Coke issued downbeat earnings guidance. It forecasted that earnings per share could fall by one per cent or rise by one per cent. The company also forecast internal revenue growth of four per cent.

Then again, some factors behind Coke’s downbeat forecast have improved. One was expectations that the Federal Reserve (the US central bank) would raise interest rates. In fact, the Fed has indicated that it’s likely to soon cut interest rates. A second factor that has improved is foreign exchange rates. Coke expected a higher US dollar to reduce the value of its foreign earnings. But the US dollar has fallen. Lower interest rates will hold down the US dollar. This would benefit Coke’s earnings.

Coke is already doing better than expected

These positive developments are already helping Coke. In the first quarter of 2019, it earned 48 cents a share from continuing operations. This beat the market’s expectation of 46 cents. Similarly, in the first quarter the company generated revenue of $8.02 billion. This exceeded the market’s expectation of $7.88 billion. That’s partly why Coke’s share price rose.

At this time of the year, the market’s focus increasingly turns to the outlook for the year ahead. In 2020, Coke’s earnings are expected to jump by 8.1 per cent, to $2.66 a share. Based on this estimate, the shares trade at a better forward price-to-earnings ratio of 23.1 times. As Coke adjusts to a changing marketplace, we expect its earnings growth to accelerate.

Coke remains a buy for patient investors seeking further long-term share price gains plus attractive and growing dividends.

This is an edited version of an article that was originally published for subscribers in the July 26, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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