My main narrative for KO:
- Strong brands
- Well established distribution network (starting from the source (water) over botteling and delivery to selling points) with an "all world" footprint
- To grow revenue KO now sells also Coffee (Costa) and other beverages over the existing network. The idea is to have the beverage for every daytime, so the offering and with that revenue will still increase
- To optimize finance (less investments) botteling in several countries is outsourced as a franchise
- Strong growth in Latin Amerika
But:
- I miss innovations or trend setting
- Basically they purchase niche players or lower Top5 brands and scale them through their distribution network
- Or cooperate, in case of Monster beverage
I focus also on:
- ... more equity than debt. Ratio is at 157% (debt/equity). Even if you take cash of nearly $17b into account, you end up at 96%. For me too much debt.
- ... a ROE of about 20%. Past 39%, future 46%. Even if the equity would increase, the ROE would be still good.
I see the following challenges for the management:
- Regular Dividend payment is the main reason for investors, and payout ratio is with about 75% on a high level. So this needs a continously growing business size.
- On the other hand, to reduce debt, they could grow Costa and then sell it with a good benefit. But then a smaller KO with less earnings brings dividend payments at near 100% payout ratio...
- ...and returns would drop, so stock price would also go dwon.
So let's see how long Costa remain part of KO.There are also chances ahead:
- With $17b in cash there is room for acquisition and then scale them up
Finllay:
- KO is still a base investment and easy to handle for dividend investors, since solid dividend payment makes it easy to stay invested during a downturn.
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Disclaimer
The user Tokyo has a position in NYSE:KO. Simply Wall St has no position in any of the companies mentioned. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.