Why Investors Should Continue to Love Coke
Aug 13th 2012 11:24AM
Updated Aug 13th 2012 4:18PM
From just about 10 a.m. right through to dinnertime, I'm wired on caffeine. These days, I get it through coffee, which I can control the provenance of and the number of calories in. When I was a kid, I thought coffee would never appeal to me, and that my adult life would be full of morning cans of Coca-Cola (NYS: KO) to get me fired up for the day. That's probably a horrible idea, in retrospect. A 12-ounce can of full-fat Coke sets you back 140 calories of pure corn syrup. But while I no longer want to ingest, I'm getting ready to invest. Here are my three main reasons for loving Coke.
The stickiest brand moat in the world
There are a lot of things that add value to a company, but that may not always show up on balance sheets. The most important, in my mind, is brand. Coke's branding is known the world over, and is so ubiquitous that it doesn't even need to mean anything anymore. In fact, it's been ranked No. 1 in the world by Interbrand's brand rankings. That's a power that you can't unseat.
But that hasn't stopped Pepsi (NYS: PEP) from giving it the old college try. In its last quarter, beverages accounted for $11 billion in revenue, which was 65% of overall revenue. In comparison, Coke also made $11 billion in beverage sales, with the remainder of its $13 billion in total revenue coming from bottling operations.
The only other meaningful contender is Dr Pepper Snapple (NYS: DPS) , and it's so small relative to Coke that it's almost a footnote. Last quarter, it made $1.6 billion in revenue, less than Pepsi made simply selling food in Latin America. While the brand has some following in the U.S., it's never going to be a real competitor for Coke's market share.
The wisdom of really smart people
Before I buy things, I like to ask around to see if other people have had luck with them. I'm in the market for a tablet, and you can bet I'm not going to just walk into Joe's Tablet Outlet and pick the first thing off the shelf. When it comes to getting stock advice, I can't think of a better guide than Warren Buffett's investments through Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) . Not only does Buffett hold around 9% of Coke's total stock, he has also said that Coke's dominance couldn't be upset -- even if you had $100 billion to spend.
Buffett has used Coke to illustrate the value of buying commodities and selling brands. While we'd all agree that this is a great point, I'm also going to take the commodity introduction as an opportunity to point out one of Coke's risks. The company uses a lot of corn syrup -- so much that it hurts to think about. You may have read recently that corn prices have risen to record levels because of extreme temperatures, drought, and the subsequent destruction of this year's crop. That's going to hurt Coke's bottom line.
But it's not going to break the company. If prices continue to elevate, Coke's brand gives it the ability to increase prices so that consumers pay for the increase in raw materials. If the costs drop back to historic levels, then there will be no ongoing problem. I expect corn prices to be an issue over the next year, but not beyond that.
The moral risks
Coke has been a fantastic investment, and it's going to continue being one. With its strong brand and massive footprint, it can take on all comers and make investors a boatload of money. But it would be unfair to just say, "Go buy it" without looking at some of the non-financial risks of Coke. There are two main problems, and it's up to investors to decide if they're willing to take on the baggage that comes with Coke.
First, Coke has had accusations of human rights violations come up over the years. Most of the accusations have focused on the treatment and abuses that are alleged to have taken place around Coke bottling plants. In recent years, these have focused on plants in South America, where union workers have been killed, allegedly because of instructions by managers from the bottling plants.
The second issue is that Coke makes almost no products with any real nutritional value. That's not to say that they can't be enjoyed as part of a healthy lifestyle, but the abuse of junk food in America is not hard to see. The obesity rate in the 6- to 11-year-old range is now up around 20%, which is horrific. It's not just soda that's problematic; Coke's Minute Maid orange juice only has three fewer grams of sugar per serving than Coke. That's more than twice the sugar found in a serving of milk.
The bottom line
With all that said, I'll continue to recommend Coke as a long-term investment. I don't want to make light of those problems. The company needs to better monitor its international operations, and I sincerely hope it moves away from high fructose corn syrup. But in the end, it produces a product that millions of people can enjoy in a healthy manner, and it has produced great returns for investors.
A final great reason to invest in Coke is its strong dividend. While my investment goals don't make the dividend as important as growth, Coke's consistent payout has earned it a spot in the Fool's report on the three Dow stocks dividend investors need. The companies detailed in this report are a great dividend starter kit, and you can get all the details for free. Click here to get your report today.
The article Why Investors Should Continue to Love Coke originally appeared on Fool.com.Fool contributor Andrew Marder does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Coca-Cola, Berkshire Hathaway, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Berkshire Hathaway, and PepsiCo, as well as creating a diagonal call position in PepsiCo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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