This article continues our analysis of the beverage industry. While I will not be digging as deeply into the business of each company that follows, we will cover a broader range of companies, starting with Coca-Cola Co. As before, all source data is from Macro Trends. Computed values are in columns with italicized headers. Amounts are in millions of U.S. dollars, and share counts are in millions.
Operating margins and net margins are very good, but, as can be seen in the series above, both margins are not entirely stable. There has been significant fluctuation in recent years. Revenue is declining, peaking in 2012 and establishing a downtrend in subsequent years, well before COVID.
Return on equity is also very good and very stable, though surprisingly not as large as I expected. With limited top line gain prospects, there is little extra power in having a high ROE. Earnings per share are also somewhat erratic, and they are not increasing either. According to Value Line's analysis of KO EPS has grown 3.5% annually over the last 10 years, but it's just a whisper of an uptrend. Some of the EPS growth has been supported by share buybacks, but these are not consistent either, and KO has been a net issuer of shares the last two years. KO buys back an average of about 0.68% shares annually, about half the rate of PEP. Recently KO has had to choose between share buybacks and dividends, as can be seen in the following table:
Among the financial trends for KO that worry me is that KO is increasingly paying larger and larger proportions of its net earnings in dividends. In 2018 and 2017 it paid out more than EPS, and in the other five fiscal years since 2014 payouts have ranged from 75% to 93%. Though it is unlikely that KO is constrained by lack of retained earnings for expansion, the absence of free cash reduces its opportunities for share buybacks.
20 to 30 years ago, the Coca-Cola brand name supported relatively long and stable valuations of cash flow. With the declining soda pop volumes of the past 10 years, that brand name is less of an advantage. Valuation then becomes a question of using the actual EPS growth of the last 10 years, or say, Value Line's projections for the current five year period. If KO grows EPS at 6% for 25 years, then it's worth $73, or $107 if you use 3% discount rates. But if KO grows at 3.5%, then its value is $50 for a "normal" 5% discount environment, or $70 for malaise/COVID 3% discount rates. These valuations use 50-55 years of future earnings, meaning that I think the earnings are likely to exist for a long time in the future. On the other hand, upside above these values would require some sort of surprise, something that currently is unexpected. Is the Coca-Cola Co. the kind of place that is likely to generate positive surprises? It may be unlikely.
Investment in KO is therefore much like investing in a bond that pays 3% interest. It's unlikely to gain much from its current price. If we get inflation, however, it would likely be able to raise prices accordingly, and see both revenue and EPS gains that would keep up with inflation, so in that respect it's unlike fixed interest debt. The overall prospects, however, seem to be somewhat less than the 10% we should expect from a large company stock.
Resources
Annual reviews for 1990 to 2019 are available from the unusually good Coca-Cola investor relations site. Also has 10Q and 10K reports, SEC filings, charts, quotes, and press releases, of course.
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