As I drink a cold Coke on a summer night, I can’t help thinking that The Coca-Cola Company (NYSE:KO) is one of the best examples of a stock that you should see as a long-term investment, rather than a trading vehicle, simply because there is no risk the company will disappear all of the sudden. You have been drinking Coca-Cola for a while, so did your parents, and most likely so will your grandchildren. Investing in such a strong and well-established brand brings safety and guaranteed value to your portfolio. However, usually these kind of investments do not provide interesting returns. They are safe and that’s about it. But how about Coke? Can it also bring sweet returns to the table?
A simple business
There’s an old rule in the traditional value investment world that says the simpler the business, the better the investment. And The Coca-Cola Company (NYSE:KO) is that kind of business.The company focused only on beverages, and managed to master everything there is to be known about this business. While doing so, it created a huge distribution network of more than 200 countries, one of the most popular brands in the world, and a safe business regardless of the economic environment. As a result, the stock price has jumped an amazing 5,177% since 1978!
The downside to keeping the business simple is that sometimes you miss some great investment ideas. At times, Coca-Cola was way too passive. Ironically, PepsiCo, Inc. (NYSE:PEP), The Coca-Cola Company (NYSE:KO)’s historical rival, recently surpassed Coca-Cola in sales, but not because PepsiCo can sell more cans of soda. Through its Frito-Lay division, PepsiCo, Inc. (NYSE:PEP) has more than 40% of the world’s salty snack market. Sure, by entering a new market in 1965, PepsiCo, Inc. (NYSE:PEP) did take a chance, but sometimes taking a chance is the best thing to do.
Amazing dividend: Coca-Cola has more than doubled its dividend since 2002!
If you are looking for a dividend stock, The Coca-Cola Company (NYSE:KO) is your choice. About 10 years ago the dividend was only 40 cents per share (approximately 1.3% yield in 2002). That doesn’t sound impressive. However, Coca-Cola kept growing its dividend. The latest quarter dividend was 28 cents. If we assume that the dividend remains the same (which is unrealistic, as Coke is always increasing its dividend), you have $1.12 in annual dividend per share, or 2.8% yield (as the current stock price is around $40 per share). And this dividend is totally safe, as in 2012, The Coca-Cola Company (NYSE:KO)’s free cash flow covered dividends paid 1.71 times over.
Many may think that a company like Coca-Cola cannot grow anymore. Well, maybe there is little room left for further growth in the U.S., but Coke still has a lot to explore in international markets. It’s no secret that the company intends to invest billions during the next decade in emerging economies (BRICS), where Coke consumption per capita is still low, when compared with American standards.
Just to mention an example, according to Morningstar, the annual per capita consumption of The Coca-Cola Company (NYSE:KO)products in China is just 38 servings, versus 8 servings in 1998. Sounds like an interesting growth rate. But that’s just the beginning! Americans have more than 400 servings per year, and as income increases I believe emerging markets will continue heading in that direction.