Why This Beverage Giant Can’t Be Toppled

A famous book on business was titled Barbarians at the Gate, documenting the leveraged buyout of RJR Nabisco. If nothing else, it highlights how just the sniff of an opportunity to make money can drive money seekers to make wild decisions.

Some giant businesses have been on the receiving end of similar threats to their solvency as invaders attempt to take their share. Take Coca Cola, for example, that was on the receiving end of Richard Branson’s piercing arrow when he launched Virgin Cola.

The threat dissipated into a fizzle eventually, but he’s simply the most prominent of the many barbarians at the Coca Cola gates. Yet, Coke has withstood all the assaults on its business over the year, why?

Key Points

• Competitors often overlook Coca Cola’s true business model, which is more about licensing for royalties than just selling beverages, leading to stable sales and consistent dividends.
• The beverage giant has a solid financial foundation, evident from its 61-year consecutive dividend history. 
• Coca Cola is attractive to investors due to its perfect Piotroski Score, high gross margins from its royalty model, and analyst projections of share price growth.

What Competitors Miss

When new competition takes on Coca Cola, they often miss the bigger picture. They make the flawed assumption that the Coke business involves making and selling a tasty beverage.

In fact, Coke is much more of an all-weather play that licenses brands and flavors in order to collect royalties. By so doing, it generates stable and predictable top line sales, de-risking the firm from heightened input costs and ensuring a more reliable and consistent dividend can be paid.

Building on this solid financial base, Coca Cola has managed to pay dividend consecutively for 61 years. Indeed, when you look at Warren Buffett’s portfolio and rank the stocks he owns by dividend yield, Coke won’t make it to the top but it should. Having held it so long, Buffett’s yield on his originally invested principal is closer to 50% annually than the 3.1% new investors today will receive.

What Coke Has Going For It

Beyond an attractive dividend yield that is highly predictable, Coke has a lot of other aces up its sleeve that new investors can attach themselves to, such as a perfect Piotroski Score of 9. This is a method to rank the best value stocks, and 9 is the best score possible.

Coke’s gross margin ties into the discussion above and is a big reason it’s so attractive to investors. Thanks to its royalty model, Coca Cola’s gross margins are sky high for a beverage maker at 61%. Celsius Holdings, for example, which has been on a tear comes in at just 50.0%.

According to analysts, Coca Cola also has further upside potential to $64 per share, suggesting close to 10% upside. So, is it a buy?

Time to Buy Coke?

If there were one obvious drawback to Coca Cola, it would be the firm’s 23.5x price-to-earnings ratio, a steep figure for such a steady ship. Usually high PE ratios are seen in growth stocks more so than reliable revenue generators like Coke.

However, with valuations stretched across the board, Coke offers a stability that few companies can point to when times get rocky. Regardless of macro environments and stock market booms and busts, Coke has withstood the volatility as well as the barbarians at the gate constantly attempting to steal its market share.

If there is a migration from higher growth stocks to safer, value plays in 2024, Coke stands out as among the best of the bunch.