For Investors, the Coca-Cola Co Stock Is No Longer It
One of my first purchases ever in the stock market, back in 1996, was The Coca-Cola Co (NYSE:KO). Back then, I considered KO stock to be a slam-dunk no-brainer. It was the premier beverage company in the entire world. Coca-Cola stock seemed like it was chugging along beautifully under a terrific CEO, had great cash flow and financials, and was a core holding.
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Then something changed — something nobody could have expected and yet probably should have expected.
It was the “health craze.” It started slowly at first and in many other areas. The organic movement happened. Then fitness caught on. Then the Atkins diet, low-carb, no-carb, Paleo and on and on. Eventually, beverages became an area where people started to change their habits. When people start making lifestyle changes, that’s bad news for many consumer product companies, like Coke.
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Drinking Coca-Cola and other sugar-heavy beverages suddenly became a no-no. Sure, Coke made acquisitions as it always had to expand its business and diversify away from its legacy business. However, there was another problem for KO stock. It’s what I called the “drink innovation wave.” Suddenly, all kinds of new beverage companies started popping up, offering all kinds of new choices, and some of them were even healthy.
That trend continues in the form of flavored and sparkling waters, or even “vitamin water.”
Thus, Coca-Cola has been struggling. Over the past five years, KO stock has returned 22%, plus about 3% annually in dividends, averaging out to a total annual return of 5-6%. That’s not impressive at all given how the overall market has performed.
Additionally, Coca-Cola has a sizable market advantage in it’s distribution platform. As a global entity, it can and does produce and distribute other gigantic brands. The very cool and hip Monster Beverage Corporation (NASDAQ:MNST) leverages Coke’s distribution network to great effect, for example.
KO stock continues to be driven by its bottling operations, as well.
The problem plaguing Coca-Cola stock, which is terribly unfortunate, is that its sales are falling. FY14 saw $46 billion in sales, but that declined to $41.86 billion in FY16. Revenue was $38.85 billion in the TTM. That has trickled down to operating income, which has fallen from $7.87 billion in FY14 to $7.36 billion in FY16.
There is good news as far as financials are concerned. KO stock has a cash hoard of $27.2 billion, offset by $31.8 billion in extremely low-cost debt. Free cash flow has been relatively consistent. While it has declined from $8.2 billion in FY14 to $6.5 billion in FY16, the company has still been able to increase the Coca-Cola stock dividend.
So where does that leave Coca-Cola stock shareholders? Analysts see 5% annualized EPS growth over the next five years. That doesn’t excite me. Even adding in the Coca-Cola stock dividend of 3.2%, and 10% premiums for cash flow and global brand, I don’t see paying more than 11x for KO stock, and it trades at 23x.
Bottom Line on KO Stock
I would not buy KO stock here. There’s just too much downside when you consider the company itself is as much as 50% overvalued, the stock market as a whole is 30% overvalued, and there are companies like Monster that are tearing it up with a more focused brand and market.
I would sell KO stock only if it is inside a retirement account or if you can generate long-term capital gains that might be offset by harvesting any losses you have this year. If those situations don’t apply, you should be prepared to hold Coca-Cola stock either for a very long time, or sell now and eat any capital gains you have to pay if you are in a lower tax bracket.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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