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This Christmas, I'm channeling my inner Warren Buffett and buying shares of Coca Cola (NYSE: KO ) to one day give to my grandkids.
I'm currently single, and I don't have any children. I guess its fair to say this is a long-term plan.
It starts with the product
First, I should state the obvious. Coke is delicious. Yes, it is full of sugar. Yes, it is high-calorie. But those facts are on the periphery. For global consumers, the Coca Cola Corporation has a product that is in demand. It's been in demand for decades. It's still in demand because it's delicious.
PepsiCo (NYSE: PEP ) is the second largest non-alcoholic beverage company in the world, and in my view, it has a very bright future as well. However, its flagship product, Pepsi Cola, just doesn't have the same wizardry on the taste buds as Coke.
Forget the ratios, the operational efficiency, the diversified revenue streams, and all the other financial jargon you've ever heard. What matters most in a business is the product, and Coke has the superior product. Market share data proves it out (as well as my most unscientific opinion).
Turning sales into shareholder value
Of course, though, a successful company must not only sell its product, but also turn a profit and return value to shareholders. Once again, Coca Cola does an excellent job here, as well -- something that has been true for years.
Take the dividend, for example. The chart below demonstrates the reliable, consistent, and growing dividend. From the lower left to the upper right -- exactly the trend an investor wants to see every Christmas morning.
The company's profit margins tell a similar story. Excluding a few outlier years -- one skewing lower, the other skewing higher -- Coke's been consistently and reliably able to wring out of a profit of about $0.20 on the dollar for years now. I see no reason for this trend to change.
For a more tangible, non-financial example of Coke's ruthless operational prowess -- and its commitment to its products, look no further than this profile from BusinessWeek magazine, digging into Coke's orange juice business.
Coke utilizes a highly computerized system, known internally as the "Black Book," to standardize its orange juice year round, despite weather, batches from across the globe, time of year, and costs.
It is incredible in its sophistication and effectiveness. It creates consistently tasting juice year-round from a crop that only has a three-month season.
The Black Book model includes detailed data about the myriad flavors -- more than 600 in all -- that make up an orange, and consumer preferences. Those data are matched to a profile detailing acidity, sweetness, and other attributes of each batch of raw juice. The algorithm then tells Coke how to blend batches to replicate a certain taste and consistency, right down to pulp content. Another part of Black Book incorporates external factors such as weather patterns, expected crop yields, and cost pressures. This helps Coke plan so that supplies will be on hand as far ahead as 15 months. "If we have a hurricane or a freeze," Bippert says, "we can quickly replan the business in 5 or 10 minutes just because we've mathematically modeled it."
What about growth?
Over the past few decades, growth at Coke has been all about the international markets. That remains true today.
In this article, fellow Fool Ted Cooper lays out a convincing case that Coke still has plenty of room to run internationally.
Ted points to the per capita Coke consumption of the top 10 consumers worldwide relative to the rest of the world. His point is simple, and I agree with him. The rest of the world -- outside of the U.S., Latin America, and a few other isolated countries -- has not yet fully come to know the Coke brand or the Coke flavor.
A final point: The health risk
Investing is, by its very nature, a business of risk. Things don't always go as planned. Management at Coke recognizes this and is taking steps to mitigate possible risks to the business. Most significant for Coke is the obesity epidemic here in the U.S. and elsewhere in the Coca Cola footprint.
First, we must remember that Coca Cola Corp is not just Coca Cola. Its 54 other brands including sports drinks, bottled waters, juices, and diet sodas. Coca Cola is certainly the lead brand, but it is supported on its flanks by a plethora of other, well-diversified non-alcoholic beverage products.
So, in the event of a public outcry against sugary beverages, the company does have a back-up plan to pick up some of the slack. PepsiCo is perhaps better diversified through its ownership of Frito Lay, the worlds largest salty snack company, but at the end of the day, the health risk exists prominently for Coke, Pepsi, and Frito Lay.
Further, as pointed out by Ted in the article linked above, Coke has pricing power. A modest increase in pricing because of government-imposed taxes should not impact the vast majority of Coke buyers. An extra $0.25 is simply too small a price to pay to have any meaningful negative impact.
Warren Buffett began buying Coke in the late 1980s. It has since become one of his greatest investments. Fifteen years later, I too am going to begin buying shares of Coca Cola. I look forward to passing them to future generations of my family, decades from now.
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