Coca-Cola is the epitome of a global corporate American icon. Invented in 1886 by a pharmacist as a cure for morphine addiction, dyspepsia, neurasthenia and many other diseases, now commercialised, it is the largest soft drink in the world by some distance, sold in over 200 countries. The brand has even managed to redefine Christmas through its ‘holidays are coming’ advertising campaigns, which for many, are the first sign that the festive period has started (the kind of tie up that most marketing departments can only dream of).
Coca-Cola operates through a distribution system where the main company (The Coca-Cola Company) owns and sells the syrup concentrate to a network of company controlled or independent bottling partners, wholesalers and retailers. Each bottling company owns exclusive territorial distribution rights for a defined global zone.
The Virgin Investor will note that there are three Coca-Cola companies listed on the New York Stock Exchange – The Coca-Cola Company (the main company), and two bottling companies; Coca-Cola European Partners plc and Coca-Cola Femsa SAB de CV. Given all these companies sit on the same stock exchange, and are largely reliant on the same product, where should The Virgin Investor consider putting their money?
The Coca-Cola Company (market Cap: $176bn)
The Coca-Cola Company sells the syrup concentrate into a number of different global bottling companies, which gives the main company global diversification, protecting against declines in individual markets (although the US market made up 46% of operating revenues in 2015).
The main company is also, as you’d expect, extremely financially sound with cash funds available amounting to approximately $7bn. This is a sizeable pot to invest to boost returns (for example in product innovations and brand exercises) or mitigate risks. From this cash rich position, The Coca-Cola Company also has a strong track record of dividend payment, with over 50 years of consecutive dividend increases and a 2015 dividend yield of 3.1%.
The fortune of the main company is still highly sensitive to consumer sentiment towards Coca-Cola and carbonated soft drinks with 73% of the company’s total volume coming from its core soft drinks brands. In the US, health concerns and competitor pressure has ensured that the carbonated soft drinks market has declined for the 11th year running. Given that in 2015, the US market generated $20.4billion or 46% of operating revenues of the main company, declines without sufficient replacement from overseas markets or other products are a real concern. It will be up to The Coca-Cola Company to use its significant financial resources over the coming years to take further advantage of these alternative markets.
The Bottlers: Coca-Cola European Partners plc (market cap: $16bn) and Coca-Cola Femsa SAB de CV (market cap: $13bn)
All Coca-Cola bottling partners are given exclusive rights for a particular region of the world and in this case, Coca-Cola European Partners have the rights to most of Europe and Coca-Cola Femsa have the rights to a large part of Central and South America.
This means that the performance of each bottling partner can be highly dependent on the economic situation of their region, consumer demand for the product and also foreign exchange rate differences as revenues are reported in US dollars (a weaker dollar will increase the value of revenues earned in foreign currency).
The bottling companies own the fixed assets that enable them to bottle vast volumes of drinks so whilst dependent on consumer demand for Coca-Cola in the short term, they could diversify their business should demand for Coca-Cola reduce over time.
Coca-Cola bottling partners also have a strong culture of dividend payment. In 2015, Coca-Cola European Partners had a 2015 dividend yield of 2.3% and Coca-Cola Femsa a 2015 dividend yield of 2.6%.
In the short term, both the main company and the bottling companies pay strong dividends leaving little to choose between the two.
In the long term, with the great financial resources at its disposal, The Coca-Cola Company is in a good position to capitalise on changing consumer trends through acquisitions. Also there is potential for greater penetration in a number of global markets through exploiting improving economic circumstances and growing the brand. The correct investments will generate a degree of capital growth into the future.
Both Coca-Cola European Partners and Coca-Cola Femsa operate in highly developed markets for Coca-Cola and so significant future growth may be limited. They may choose to bottle other products to ensure continuity of the business and diversify against a decline in Coca-Cola volumes. This should give a degree of dividend security into the future.