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The Coca-Cola Company (KO): This Beverage Giant Is Still the One for You!

The Coca-Cola Company (NYSE:KO)I am criticized often among my investor friends for advocating that most of a long-term portfolio should be filled with what they refer to as “boring” stocks. It is my goal to make people understand that sometimes these companies that are widely thought of as boring can significantly outperform the market over the long run. For example, I recently wrote an article about Johnson & Johnson (NYSE:JNJ) in which I showed how $10,000 invested in the company 20 years ago would be worth almost $150,000 today. Today, I’d like to focus on the food and beverage sector, and particularly The Coca-Cola Company (NYSE:KO), which I feel is one of the best places in the market to stick your money over the next few years.

Coca-Cola today

The Coca-Cola Company (NYSE:KO) is well known for being the world’s largest soft drink producer in the world, but it also produces more juice and juice-based products than any other company in the world. The company sells its products in over 200 countries and owns over 500 brand names. Aside from its trademark Coca-Cola brand and its varieties, the company also produces and sells Sprite, Full Throttle, Mello Yello, Powerade, and Minute Maid juices, just to name a few. Most products are sold in both finished ready-to-drink form as well as concentrate form, which is generally used by restaurants and retailers with soda fountains.

Still room for growth?

While The Coca-Cola Company (NYSE:KO)’s U.S. market may be pretty saturated with regards to its core products, the company still has several avenues of growth to pursue. First of all, even though Coca-Cola is sold all over the world, over 63% of the company’s revenue comes from North American sales and bottling operations. Only 36% of Coca-Cola’s revenue is made up of international sales, which indicates that its overseas markets are far from saturated with its products.

Another way that the company has grown (and plans to continue to do so) is through acquisitions. Recent notable purchases include Energy Brands (maker of vitamin water) in 2007 for $4.1 billion and Great Plains and Honest Tea in 2011. The company has also made numerous purchases of international brands and bottling operations, which gets back to my first point about international growth.

The numbers

The Coca-Cola Company (NYSE:KO) trades for what I consider to be a very reasonable valuation of 20 times TTM earnings. The company is expected to produce low single-digit revenue growth rates over the next several years, but is expected to grow its earnings significantly due to higher projected profit margins (mainly due to divesting some of its bottling operation, which carries a lower margin). As a result, the consensus calls for Coca-Cola to earn $2.15 per share this year, rising to $2.33 and $2.54 in 2014 and 2015, respectively. So, the company is expected to grow its earnings at over 8% annually going forward.

I believe the relatively high P/E ratio is justified due to the strength and stability of Coca-Cola’s operations, as well as its track record of delivering shareholder value. Coca-Cola pays a dividend yield of 2.8%, and has paid a dividend regularly since 1893, so it sounds pretty safe going forward. The company has also raised the payout consistently over the years. Assuming dividend reinvestment, a quick calculation shows long-term investors made a 520% return over the past 20 years.

The obvious alternative

PepsiCo, Inc. (NYSE:PEP) is very similarly valued to Coca-Cola, so much so that as investments, the two are almost interchangeable. PepsiCo trades at a slightly higher P/E of 20.7 times TTM earnings and pays a 2.8% dividend yield. Some investors prefer PepsiCo because of its more diversified lineup of products, which include a large lineup of snack foods in addition to the beverage lines. In fact, food sales in the U.S. account for 37% of PepsiCo’s total revenue. The consensus estimates call for PepsiCo to grow at the same 8% rate as The Coca-Cola Company (NYSE:KO), so it’s really a matter of personal preference. I prefer Coca-Cola because of its dominant brand name that is a leader all over the world.

Another way to go

For those who might prefer to invest in an even more food-oriented company, take a look at Kraft Foods Group Inc (NASDAQ:KRFT). Kraft is a leading manufacturer of cheeses, dressings, meats (Oscar Mayer), coffee (Maxwell House), and much more. Kraft is a much better dividend payer at 3.58% and trades at a similar P/E of 20.8 times TTM. However, the company is expected to grow at a slightly slower 7% rate going forward. Over the long run though, I think that Kraft has the most international growth potential, with just 14% of its revenue coming from international markets, mostly in Canada.


None of these three companies would make a bad choice for your portfolio. I happen to like The Coca-Cola Company (NYSE:KO) slightly better than the other two for its strong brand name, ambitious growth of its product lines, and its excellent record of delivering value for shareholders.

The article This Beverage Giant Is Still the One for You! originally appeared on and is written by Matthew Frankel.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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