The Coca-Cola Company (NYSE:KO) has been a stalwart of the Dow Jones industrial average, and has been a favorite in Berkshire Hathaway Inc. (NYSE:BRK.B)’s equity holdings for years. The Coca-Cola Company (NYSE:KO) has a simple business model and a product that is arguably the most known brand in the entire world. This company has been rewarding shareholders for decades, and has laid out a plan to double its revenue and volume in a decade. Coca-Cola will accomplish this by methodically repurchasing shares, utilizing its global distribution network, and reducing expenses.
Coke repurchased 3% of its shares outstanding over the past two years; this is modest, to say the least. As time marches forward, Coke will continue to use the cash that has recently been tied up in purchasing bottlers to repurchase shares. This will add to its earnings over time and give each investor a slightly bigger stake in The Coca-Cola Company (NYSE:KO)’s overall profit.
The number one Dow component to execute an accretive share repurchase in 2012 was Travelers Companies Inc (NYSE:TRV). Travelers Companies Inc (NYSE:TRV) has repurchased 13.1% of its shares outstanding since 2013. This boring insurer has been able to realize an actuarial profit, even through Super Storm Sandy. Travelers Companies Inc (NYSE:TRV) could continue to see its earnings grow by double digits by maintaining a growth rate of 5% organically while repurchasing shares at the same percentage each year. The biggest risk to the company is that people catch on that it’s a great investment and boost the share price.
The Coca-Cola Company (NYSE:KO) has been increasing its long-term debt as it has swallowed up its bottlers and repurchased shares. As long as interest rates are lower than the dividend amount of 2.5%, borrowing money to fund share repurchases is actually accretive to Coca-Cola’s overall cash position on a yearly basis.
The risk to this is that if The Coca-Cola Company (NYSE:KO) borrows too much money, the company’s credit rating could be lowered, leading to higher interest rates. The other risk is that as overall market interest rates start rising, it will lead to higher borrowing costs. Until that point, Coca-Cola can continue taking advantage of this market situation.
Coca-Cola’s operating margins currently stand at 22.3%, up from the mid-teens in 2009. They will continue to climb as expenses are reduced and synergies realized. The Coca-Cola Company (NYSE:KO) is looking for synergies between the bottlers that it has recently purchased, which should continue to push gross margins up. Coca-Cola is looking to automate production and potentially merge bottling operations to increase efficiencies.