Published June 24th, 2015
Coca-Cola (KO) has long been a favorite of The 8 Rules of Dividend Investing. Here’s why.
The company has a 3%+ dividend yield, solid 7% to 9% constant currency earnings-per-share growth expectations, and a strong competitive advantage.
When investors think of Coca-Cola, they often think only of the company’s ubiquitous sodas. Today, Coca-Cola is so much more than a soda business.
This article takes a look at the 20 beverage brands Coca-Cola owns that generates $1 billion or more in sales each year. The impact of Coca-Cola’s billion dollar brands, along with emerging brands, will be analyzed to see Coca-Cola’s future growth potential.
Minute Maid was Coca-Cola’s first non-carbonated beverage… Coca-Cola acquired Minute Maid in 1960. Coca-Cola has been in the juice business for 55 years.
Minute Maid was founded in 1945. The company got its start by winning a government contract for providing powdered orange juice to the United States Army. Fortunately for the world, but unfortunately for Minute Maid, the war ended that year and the contract was cancelled.
Minute Maid did not fold. The company pioneered the frozen orange juice concentrate approach and grew quickly. Minute Maid released its first bottled (as opposed to frozen) juice in 1973 to compete with Tropicana (now owned by PepsiCo).
Since then, the Minute Maid brand has continued to grow. By 1997, Minute Maid was generating over $2 billion a year in sales. The last estimate of the company’s sales was in 1997, but the brand has continued to grow globally since that time. The brand now likely generates revenues of between $4 billion and $8 billion every year for Coca-Cola.
Minute Maid Pulpy
Minute Maid Pulpy was launched in China in 2005. The company reached billion dollar brand status in 2010,after just 5 years.
Minute Maid Pulpy is the first brand Coca-Cola launched exclusively in an emerging market to reach annual revenues of $1 billion or more per year. Like American consumers, Chinese consumers are slowly trending toward healthier alternatives.
The Minute Maid Pulpy brand appeals to a more health conscious consumer. Juices simply do not have the same stigma as soda does. This trend will very likely result in future growth for the Minute Maid Pulpy brand in China, Singapore, Thailand, and other Asian countries.
The Simply brand of juices is sold in the United States and Canada. The brand was releases in 2001 and reached billion dollar status by 2009. Simply’s best-selling juice is orange juice. The company’s orange juice is 100% juice and not-from-concentrate.
Despite the ‘Simply’ name, the process of manufacturing Simply orange juice is far from squeezing orange juice into a bottle.
First, different types of oranges are grown, harvested, and juiced. The orange juice is flash-pasteurized and the oxygen is removed from the juice to prevent spoiling. The juice is then categorized and separated by over 600 flavor variables. The juice is recombined in a precise formula, and natural concentrated orange flavor is added.
Why does Coca-Cola go through this intense process? To provide a standardized experience for consumers. In this way, Simply orange juice will always taste the same despite variances in weather which would otherwise change orange juice tastes.
The advanced process Coca-Cola uses gives it an advantage in juice. The company realized 7% volume growth in the Simply brand in fiscal 2014, far outpacing volume growth in total still (non-carbonated) beverages of 4% for the company.
Coca-Cola acquired Del Valle in 2007 for a total of $470 million ($380 million in cash and $90 million in assumed debt). At the time of acquisition, Del Valle had annual sales of around just under $500 million a year. By 2010, Coca-Cola grew Del Valle to reach $1 billion a year in annual sales.
The Del Valle brand is sold in the United States and Latin America. The two largest markets for the brand are Mexico and Brazil. Del Valle sells a variety of fruit juices.
Coca-Cola has been able to quickly grow revenue in the Del Valle brand by standardizing packaging and unifying the brand. The company’s standardized packaging helps consumers to quickly identify the Del Valle brand, despite several different flavors of juice. In addition, Coca-Cola’s bottling partners, strong distribution, and expertise in advertising have all played important parts in Del Valle’s success since the 2007 acquisition.
Powerade was released in 1988 to compete with PepsiCo’s Gatorade brand. Since that time, the company has captured around 20% of the sports drink market. Gatorade still has a commanding market share of around 70%.
Powerade has grown through sponsorships of various sporting events. Powerade currently sponsors or has sponsored the following sports events: Australian Rugby League, Rugby Union Teams in Australia, Ireland, and New Zealand, NASCAR, the PGA Tour, the NCAA, several FIFA soccer league teams, and the U.S. Olympic team (excluding basketball and soccer), among other sporting events and teams.
The Powerade brand is currently managed by Coca-Cola’s Glaceau Vitamin Water team. Powerade is a global brand sold around the world.
Glaceau Vitamin Water
Glaceau Vitamin Water was acquired by Coca-Cola in 2007 for $4.1 billion. Along with Vitamin Water, Glaceau also sells Smart Water and Fruit Water. The deal was Coca-Cola’s largest acquisition at the time.
At the time of acquisition, Glaceau had annual sales of $350 million. Coca-Cola acquired the company for a price-to-sales ratio of 11.7, more than 10 times the price-to-sales ratio the company paid to acquire Del Valle in the same year.
Coca-Cola quickly grew Vitamin Water into a billion dollar brand after acquiring it. Still, the company paid such a loft valuation multiple for the company that the deal likely should not have been made. Coca-Cola would have been much better off simply repurchasing its own shares than paying $4.1 billion for a brand with $350 million in annual sales; not profits.
Aquarius is the leading sports drink in Japan. Coca-Cola also sells water under the Aquarius brand in various countries. Coca-Cola release Aquarius in 1983.
The brand’s growth model is similar to that of Powerade. Coca-Cola sponsors international sporting events to promote the Aquarius brand. The brand is most popular in Asia, especially Japan.
Ayataka is a calorie free green tea brand sold in Japan and Singapore. The Ayataka brand imitates the experience of drinking traditionally brewed Japanese green tea.
Coca-Cola introduced Ayataka in 2007. By 2012, the brand reached $1 billion per year in annual sales. The Ayataka brand’s success comes from its unique formulation and marketing.
When consumers swirl a bottle of Ayataka, they can see cloudiness and particles inside the beverage. This is a similar experience to authentically brewed green tea in Japan. The Ayataka brand is an on-the-go solution for Japanese green tea drinkers.
The Coca-Cola brand is the most popular ready-to-drink beverage in history. Coca-Cola was created in Atlanta, Georgia in1886 by John Pemberton.
The Coca-Cola brand is sold in over 200 countries in the world. Coca-Cola is an iconic brand. It is instantly recognizable around the world.
The Coca-Cola brand needs little explanation. The amazing success of the Coca-Cola brand has resulted in Coca-Cola company’s tremendous growth over the last 100+ years.
Fanta is Coca-Cola’s second oldest company owned brand. Fanta was created in 1940. Due to a trade embargo, Coca-Cola could not import its products to Nazi Germany. The head of Coca-Cola Germany at the time decided to create a new soda with only ingredients available in Germany. The result was Fanta.
After World War II, Coca-Cola shut down Fanta and began producing Coca-Cola again in its German facilities. The company re-launched Fanta in 1955 after PepsiCo launched several new products. Fanta is heavily marketed in Europe, Asia, Africa, and South America.
The 75th anniversary of Fanta was celebrated in Germany this year. Coca-Cola once again had a marketing failure. The company issued a ‘less sweet’ version of Fanta that was similar to the original war-time formula of Fanta. Coca-Cola said it wanted to get back the ‘feeling of the Good Old Times’. The early 1940’s in Germany were not ‘good old times’, and many misinterpreted Coca-Cola’s message. Coca-Cola quickly replaced its advertisement.
Sprite is one of the most popular soft drinks in the world. The lemon-lime soda was introduced by Coca-Cola in 1961. Sprite is now sold in over 200 countries.
Sprite was originally developed in Germany in 1959 as ‘clear lemon Fanta’. Coca-Cola decided to rebrand the soda and call it Sprite for the United States market. Coca-Cola introduced Sprite to compete with 7-Up. Sprite’s sales surpassed 7-Up’s decades ago.
Diet Coke was introduced to the market in 1982. Since that time, the Diet Coke brand has become one of the most successful soda brands in the world. Today, Diet Coke is sold in over 185 countries.
Diet Coke is the 3rd most popular soda in the United States, behind only Pepsi and Coca-Cola. The market share in the United States for the top 5 most popular sodas is shown below:
- Coca-Cola: 17.6% market share
- Pepsi: 8.8% market share
- Diet Coke: 8.5% market share
- Mountain Dew: 6.9% market share
- Pepper: 6.8% market share
Diet Coke is nearly as popular as Pepsi is in the United States. Coca-Cola’s soda brands are significantly stronger than Pepsi’s based on market share.
Coca-Cola Zero is Coca-Cola’s latest soda brand to reach $1 billion in annual sales. The Coca-Cola Zero brand was launched in 2005. By 2007, it reached billion dollar brand status.
Coca-Cola Zero’s success is a result of the massive brand equity in the Coca-Cola brand. The Coca-Cola Zero brand is targeted specifically at males. Diet Coke is more popular with women while men tend to avoid the soda due to the word ‘diet’. Coca-Cola Zero is Coca-Cola’s answer to a low calorie soda for men.
The Georgia Coffee brand includes more than 100 ready-to-drink coffee beverages. The Georgia Coffee brand was first introduced in Japan in 1975. Since that time, the brand has expanded to China, South Korea, Singapore, and India.
The Georgia Coffee brand is especially successful in Japan. Georgia Coffee is the leading ready-to-drink coffee brand in Japan. The Georgia brand sells more than twice as much volume as the Coca-Cola brand does in Japan.
The ready-to-drink coffee market makes up 21% of the entire ready-to-drink beverage market in Japan. Teas account for 22% of the market, with carbonated beverages coming in at 15% and bottled water at 13%. Canned/bottled coffee is much more popular in Japan than it is in the United States. The Georgia brand’s leading market share in the Japanese ready-to-drink coffee market is a substantial earnings generator for Coca-Cola.
Coca-Cola owns the Schweppes brand outside of the following countries: The United States, Canada, Mexico, and most of the European Union. Dr. Pepper/Snapple (DPS) owns the Schweppes brands in the previously mentioned countires.
The process of carbonating beverages was invented in 1770 by Joseph Priestley. Jacob Schweppe refined and patented his own process of creating mineral water in 1783, creating the Schweppe’s brand. The Schweppe’s brand is Coca-Cola’s oldest owned brand – much older than the Coca-Cola brand itself which was created in 1892.
I LOHAS became a billion dollar brand this year. I LOHAS was launched in Japan in 2009. Since that time, it has quickly become the leading mineral water brand in Japan.
The I LOHAS brand is marketed to be an earth friendly product. After drinking an I LOHAS beverage, consumers can simply twist the bottle to compact it, reducing the size its size for more efficient disposal. The image below show the ‘twisting’ idea of the bottle.
The disposal of garbage has long been a more discussed issue in Japan than in the United States. Japan’s large population and small country size make garbage space come at a premium. The more efficient landfill space of the I LOHAS bottle is particularly appealing in Japan.
Dasani was released by Coca-Cola in 1999. Coca-Cola created Dasani to compete with PepsiCo’s (PEP) popular Aquafina water brand. Since that time, Dasani has become the market leader in the highly fragmented bottled water industry in the United States with a 7.4% market share.
Coca-Cola attempted to launch ‘Dasani Twist’ in 2012. Dasani Twist uses the same ‘twisting packaging’ that has propelled I LOHAS to success in Japan. Dasani Twist did not drive sales in the United States like it did in Japan.
Dasani is most popular in the United States and Canada. Coca-Cola botched the product’s release in the United Kingdom in 2004. Coca-Cola’s advertising department used the phrase ‘bottled spunk’ to describe Dasani. Coca-Cola clearly didn’t do their research; ‘spunk’ is slang for semen in the United Kingdom. If that weren’t bad enough, bromate – a known carcinogen – was found in Dasani in the United Kingdom. Coca-Cola pulled Dasani from the United Kingdom market and has not introduced Dasani to continental Europe.
Dasani has not been a hit internationally. Coca-Cola’s Bon Aqua brand is its international answer to bottled water.
Bon Aqua became a billion dollar brand in 2013. The Bon Aqua brand’s most popular markets are Russia, Hong Kong, South Africa, and Germany.
Gold Peak tea was released in the United States in 2006. It reached billion dollar brand status by 2014. Gold Peak tea is made with real sugar, tea leaves, and water. The brand has no preservatives.
Gold Peak tea has realized rapid growth since its release. The ready-to-drink tea industry is growing quickly as consumers look for caffeinated beverages that are healthier than sodas. Coca-Cola has a long growth runway ahead in tea. The company currently has just a 6.8% global market share in the ready-to-drink tea category.
Fuze Tea is Coca-Cola’s first global tea brand. Coca-Cola released Fuze Tea in 14 countries in 2012. Just 2 years later, Fuze Tea became a billion dollar brand. Going from 0 sales to $1,000,000,000 a year in 2 years is nothing short of phenomenal.
Since its release, Fuze Tea has been quickly expanded to nearly 40 countries. The global success of Fuze Tea is a result of Coca-Cola’s excellent global distribution platform. Fuze Tea will likely continue growing along with the ready-to-drink tea category.
Coca-Cola’s 20 billion dollar brands give it an unrivaled portfolio of high quality beverages to drive profits. The company must continuously create or acquire new brands to drive further growth and stay ahead of industry trends. Coca-Cola’s Venturing & Emerging Brands division is responsible for finding ‘the next big thing’. To use a baseball analogy, the Venturing & Emerging Brands division is Coca-Cola’s farm system. Once a brand graduates, it hits the ‘big leagues’ and gets to utilize Coca-Cola’s unrivaled distribution system.
The Venturing & Emerging Brands division looks for new niche or upcoming beverage brands with at least $10 million or more in sales. It invests in these brands and works with them to reach at least $75 million in annual sales. Once that number is reached, the brand is eligible for moving into the corporate Coca-Cola business.
The Venturing & Emerging Brands division was created in response to the Glaceau acquisition. Coca-Cola acquired Glaceau for $4.1 billion – a steep price for a business with less than $400 million in annual revenues. The Venturing & Emerging Brands division can save Coca-Cola billions by indentifying promising brands and acquiring them before they reach the size of Glaceau.
The Fuze, NOS, and Honset Tea brands are the biggest success stories so far at the Venturing & Emerging Brands division. Fuze in particular has done exceptionally well and reached billion dollar brand status in 2014. Coca-Cola acquired Fuze beverages in 2007 for around $250 million.
Coca-Cola bought 40% of Honest Tea in 2008 for $43 million. The company purchased the remainder of the company in 2011. Since Coca-Cola was exercising an option to purchase the entire company made in a deal in 2008, Coca-Cola likely paid under $150 million for the entire business, but the exact details are not disclosed. Honest Tea generated an estimated $130 million in sales in fiscal 2014. Coca-Cola is quickly expanding the Honest Tea brand. Honest Tea now has an exclusive deal with Wendy’s (WEN) to sell tea at the hamburger retailer. In addition, Coca-Cola has introduced Honest Fizz organic zero calorie sodas to capitalize on the Honest brand name.
Coca-Cola Growth Potential
In 2007 Coca-Cola had 10 billion dollar brands. Just 8 years later, the company has 20 billion dollar brands. The company sells 1.9 billion beverage servings every day. Coca-Cola’s global position by ready-to-drink beverage category is shown in the image below.
Coca-Cola is the global leader in ready-to-drink beverages. Still, the company has tremendous room for growth. The average global household consumes 26 beverage servings a day. Only 1.4 of these servings come from Coca-Cola brands.
The global population continues to rise, as do consumer incomes. Both population growth and income growth will help drive further sales for Coca-Cola. The company is investing in and partnering with African bottlers to gain better access to the continent. Africa currently has a population of 1.1 billion. By 2100, the continent is expected to have a population of over 4 billion. Populations growth is expected to be slightly negative in Europe, barely positive in North America, and slow in Asia. Africa will be the global population growth driver over the next several decades. Coca-Cola’s foresight into the continent will likely help drive growth.
In the United States, there is a perception that sodas (also called sparkling beverages) are in decline due to health concerns. The demise of the soda is fiction. Sparkling beverage sales are growing globally, although not as quickly as non-carbonated (also called still) beverage sales. The image below shows this growth over the last several years.
Both carbonated and non-carbonated beverage sales are increasing. Coca-Cola’s goal is to realize growth above the industry average. The company is certainly positioned to do so. Coca-Cola’s distribution system and marketing budget give it strong competitive advantages in the beverage industry. Coca-Cola can quickly grow billion dollar brands, as evidenced by Fuze Tea, Coca-Cola Zero, Ayataka, and Minute Maid Pulpy. All 4 of these brands reached billion dollar status in 5 years or less. Fuze Tea and Coca-Cola Zero reached $1 billion in annual sales in just 2 years.
In total, Coca-Cola shareholders can expect earnings-per-share growth of 7% to 9% a year going forward. This growth combined with the company’s 3.3% dividend yield gives investors expected total returns of between 10% and 12% a year going forward.
The Safety of Investing in Coca-Cola
Total returns of 10% to 12% a year should appeal to investors looking to compound their wealth over time. Coca-Cola shares have even greater appeal due to their low-risk nature. Coca-Cola is a Dividend King; the company has paid increasing dividends for over 50 consecutive years.
Coca-Cola sells branded beverages. This reduces the risk of investing in the company. It is virtually impossible to imagine a world where humans no longer drink beverages. This means there will always be demand for Coca-Cola’s products. This is in stark contrast to riskier technology companies. Eastman-Kodak was a member of the “nifty fifty” at one time and believed to be a high quality business suitable for long-term investment. Unfortunately, the company’s competitive advantage was built in an industry that became obsolete. Eastman-Kodak filed for bankruptcy in 2012. It is very difficult to imagine a similar fate for Coca-Cola.
Warren Buffett first invested in Coca-Cola in 1988. Since around the time of Warren Buffett’s investment, Coca-Cola has total returns of around 2,500% since that time. Not bad for a business that just sells beverages. Coca-Cola is still one of Warren Buffett’s largest holdings.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
– Warren Buffett
Coca-Cola is currently trading for a price-to-earnings ratio of 19.7 (using adjusted earnings). The company’s price-to-earnings ratio is slightly lower than the S&P 500’s current price-to-earnings ratio of 20.8. Coca-Cola is certainly not a deep value stock. The company is an exceptionally high quality business with a long growth runway ahead. Coca-Cola is likely trading around fair value at this time.
Coca-Cola has compounded shareholder wealth for very long periods of time. There is nothing standing in the way of future growth for Coca-Cola. The company will very likely continue rewarding shareholders with rising dividends and earnings-per-share as a result of Coca-Cola’s strong brand portfolio.
Coca-Cola has slowly transitioned from a business built on the Coca-Cola soda brand to a diversified global beverage powerhouse. Coca-Cola’s competitive advantage comes from its large advertising expenditures and its excellent distribution system. The company can either acquire or create new promising brands and quickly bring them onto the global scale. Coca-Cola is the global leader in juice, ready-to-drink coffee, and carbonated beverages. Coca-Cola makes an excellent investment for long-term investors looking for rising dividend income.