Why Investors Should Continue to Love Coke

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From just about 10 a.m. right through to dinnertime, I'm wired on caffeine. These days, I get it through coffee, which I can control the provenance of and the number of calories in. When I was a kid, I thought coffee would never appeal to me, and that my adult life would be full of morning cans of Coca-Cola (NYSE: KO  ) to get me fired up for the day. That's probably a horrible idea, in retrospect. A 12-ounce can of full-fat Coke sets you back 140 calories of pure corn syrup. But while I no longer want to ingest, I'm getting ready to invest. Here are my three main reasons for loving Coke.

The stickiest brand moat in the world
There are a lot of things that add value to a company, but that may not always show up on balance sheets. The most important, in my mind, is brand. Coke's branding is known the world over, and is so ubiquitous that it doesn't even need to mean anything anymore. In fact, it's been ranked No. 1 in the world by Interbrand's brand rankings. That's a power that you can't unseat.

But that hasn't stopped Pepsi (NYSE: PEP  ) from giving it the old college try. In its last quarter, beverages accounted for $11 billion in revenue, which was 65% of overall revenue. In comparison, Coke also made $11 billion in beverage sales, with the remainder of its $13 billion in total revenue coming from bottling operations.

The only other meaningful contender is Dr Pepper Snapple (NYSE: DPS  ) , and it's so small relative to Coke that it's almost a footnote. Last quarter, it made $1.6 billion in revenue, less than Pepsi made simply selling food in Latin America. While the brand has some following in the U.S., it's never going to be a real competitor for Coke's market share.

The wisdom of really smart people
Before I buy things, I like to ask around to see if other people have had luck with them. I'm in the market for a tablet, and you can bet I'm not going to just walk into Joe's Tablet Outlet and pick the first thing off the shelf. When it comes to getting stock advice, I can't think of a better guide than Warren Buffett's investments through Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . Not only does Buffett hold around 9% of Coke's total stock, he has also said that Coke's dominance couldn't be upset -- even if you had $100 billion to spend.

Buffett has used Coke to illustrate the value of buying commodities and selling brands. While we'd all agree that this is a great point, I'm also going to take the commodity introduction as an opportunity to point out one of Coke's risks. The company uses a lot of corn syrup -- so much that it hurts to think about. You may have read recently that corn prices have risen to record levels because of extreme temperatures, drought, and the subsequent destruction of this year's crop. That's going to hurt Coke's bottom line.

But it's not going to break the company. If prices continue to elevate, Coke's brand gives it the ability to increase prices so that consumers pay for the increase in raw materials. If the costs drop back to historic levels, then there will be no ongoing problem. I expect corn prices to be an issue over the next year, but not beyond that.

The moral risks
Coke has been a fantastic investment, and it's going to continue being one. With its strong brand and massive footprint, it can take on all comers and make investors a boatload of money. But it would be unfair to just say, "Go buy it" without looking at some of the non-financial risks of Coke. There are two main problems, and it's up to investors to decide if they're willing to take on the baggage that comes with Coke.

First, Coke has had accusations of human rights violations come up over the years. Most of the accusations have focused on the treatment and abuses that are alleged to have taken place around Coke bottling plants. In recent years, these have focused on plants in South America, where union workers have been killed, allegedly because of instructions by managers from the bottling plants.

The second issue is that Coke makes almost no products with any real nutritional value. That's not to say that they can't be enjoyed as part of a healthy lifestyle, but the abuse of junk food in America is not hard to see. The obesity rate in the 6- to 11-year-old range is now up around 20%, which is horrific. It's not just soda that's problematic; Coke's Minute Maid orange juice only has three fewer grams of sugar per serving than Coke. That's more than twice the sugar found in a serving of milk.

The bottom line
With all that said, I'll continue to recommend Coke as a long-term investment. I don't want to make light of those problems. The company needs to better monitor its international operations, and I sincerely hope it moves away from high fructose corn syrup. But in the end, it produces a product that millions of people can enjoy in a healthy manner, and it has produced great returns for investors.

A final great reason to invest in Coke is its strong dividend. While my investment goals don't make the dividend as important as growth, Coke's consistent payout has earned it a spot in the Fool's report on the three Dow stocks dividend investors need. The companies detailed in this report are a great dividend starter kit, and you can get all the details for free. Click here to get your report today.

Fool contributor Andrew Marder does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Coca-Cola, Berkshire Hathaway, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Berkshire Hathaway, and PepsiCo, as well as creating a diagonal call position in PepsiCo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (6) | Recommend This Article (16)

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  • Report this Comment On August 13, 2012, at 12:38 PM, PEStudent wrote:

    I like Coke - a lot - but I'd warn people about the recent run-up in KO and other blue-chip dividend stocks. I changed plans in March and moved some money into KO ($34.63) at a 3% dividend instead of 2% credit union CDs.

    If the Congress returns dividend taxes to regular tax rates, there could be a sell-off of dividend stock. It's been smilitis for me, but if I bought it now ($39.19), the price is 13% higher than Mar. 14 and the dividend 2.6% as a result.

    That's still - in the long run - worth a buy at a P/E of 10.4 based on the quick-and-dirty rule that the projected growth rate (annually for the next 5 years) plus dividend are approximately equal to it (7.6% + 2.6% = 10.2). And Coke is so stable, we don't get the typically exaggerated projected growth rates: the past 5 years were 7.5%/year.

  • Report this Comment On August 13, 2012, at 2:47 PM, XMFMadMardigan wrote:

    Company intends to double revenue by 2020. DOUBLE REVENUE. And they are one of the few mega corps that can do it. Far and above the best super-cap company I can think of. Well done, Marder, you are a martyr in a world of skewed investment advice.

  • Report this Comment On August 13, 2012, at 8:47 PM, goalie37 wrote:

    I agree with PEStudent. The stock was a great buy when I picked up my shares, but I would wait for a better opportunity to add to that position.

    Great article. +1 rec.

  • Report this Comment On August 13, 2012, at 9:52 PM, TC118 wrote:

    You mention the use of high fructose corn syrup and believe that the pricing power of the brand will allow Coke to pass on the extra cost. I would be curious to know how the ratio of diet sodas versus regular ones and whether this repricing would affect the diet sodas as well.

    I also tend to believe that the consumer with rising grocery bills due to the omnipresence of corn-based produts, corn-fed beef and poultry, and transportation costs will be less willing to shoulder the entire burden. That does not even take into account the as yet uncertain degree of damage to the soybean crop which will also affect grocery costs.

  • Report this Comment On August 14, 2012, at 8:40 AM, Nomadder wrote:

    I'm sure I don't have all the details but if corn prices get too high, couldn't they just switch to sugar? Don't they already use real sugar in some countries, and in some of their domestic sodas (or is that just Pepsi's retro effort)?

  • Report this Comment On August 16, 2012, at 11:46 AM, XMFRedRam wrote:

    Thanks for reading, everyone.

    TC118, The two should be priced in line with each other. Most sugar replacements are corn derivatives in one way or another. It's a fun little trick wherein we produce more corn that people can consume, in terms of calories. So we make some of it calorie free and then you can just keep people ingesting.

    Nomadder, That's a possibility. It'd be a big shift, though. Right now, the US uses almost all of the sugar that it creates and then imports a bit more to top off. Coke uses sugar in Mexico, I think, and some other S American countries, since sugarcane is more plentiful down there.

    Cheers, Andrew

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