If it weren't for The Coca-Cola Company (KO), legendary investor Warren Buffett wouldn't be anywhere near as rich and successful as he is today. Over 30 years ago, Buffett purchased a multibillion-dollar stake for his company Berkshire Hathaway, and he has continued holding ever since. Thanks to appreciation and dividend growth, Buffett's investment now brings in over $700 million in dividend income annually, which is impressive.
That said, Coca-Cola stock has shockingly underperformed the average returns for the stock market over the last 10 years, even when we factor in the boost from reinvesting dividends along the way. Unfortunately for shareholders, its returns aren't even close to the stock market average.
KO Total Return Level data by YCharts
Despite its long-term underperformance, investors still seem to fancy this Dividend King -- Buffett's support likely has a lot to do with that. But while Buffett and the dividend-stock community have ardently supported Coca-Cola over the past decade, there's another stock that's quietly gone up 10 times in value. And it's so closely related to Coca-Cola that it's quite literally hiding in plain sight.
The other Coke stock
Coca-Cola's annual report says, "We own or license and market numerous beverage brands." Absent from this description is any mention of bottling and distribution. This is handled in the next paragraph: "We make our branded beverage products available to consumers throughout the world through our network of independent bottling partners, distributors, wholesalers and retailers as well as our consolidated bottling and distribution operations." (Emphasis added.)
That's where under-the-radar Coca-Cola Consolidated (COKE -1.03%) comes in. This North Carolina-based company owns the rights to Coca-Cola products as well as certain products from Keurig Dr Pepper and Monster Beverages. It makes, distributes, and sells these various beverages to grocery stores, convenience stores, and other outlets in 14 states.
According to filings from Coca-Cola Consolidated, 86% of its sales volume is for Coca-Cola products. Therefore one would think that stock returns for Coca-Cola and those for Coca-Cola Consolidated would be comparable. But as the 10-year chart below shows, returns aren't even close.
KO Total Return Price data by YCharts
The chart above demands that investors pay attention to Coca-Cola Consolidated stock. And here, I'll explain why it's been a winner.
Is this the real Coke stock to buy?
About 10 years ago, Coca-Cola Consolidated transformed its business -- it got rid of some operations but acquired new distribution regions, rights, and facilities, which has contributed to higher revenue. While management was restructuring, profit margins declined. However, after the work was wrapping up in 2018, profits took off again, as the chart below shows.
COKE Revenue (TTM) data by YCharts
Coca-Cola Consolidated enjoys consistent consumer demand thanks to many popular beverages from Coca-Cola, Dr Pepper, and Monster. And through operational discipline, the company's profitability has improved.
With relatively limited options to grow its business with the profits, Coca-Cola Consolidated has turned its attention to making good long-term capital-allocation decisions. And it's now in the best place it has been financially in decades.
Over the last five years, the company has reduced its debt by almost 50%. As of the third quarter of 2023, it had cash and cash equivalents of $616 million and debt of only $599 million -- the first time it's had net cash on the balance sheet in nearly 40 years.
Coca-Cola Consolidated is on a solid financial footing. Yet, looking ahead to the future, the company might see only modest, single-digit revenue growth. In Q3, its top line increased by 9% year over year, but this was due to price increases. Things are slowing as it moves past the price-increase boost.
The good news, however, is that management for Coca-Cola Consolidated believes it can maintain its profit margins. So even if growth is slow for a season, the company will get financially stronger as profits pour in. These profits can be used to keep paying down debt or giving back to shareholders by increasing its quarterly dividend.
As of this writing, Coca-Cola Consolidated stock trades at just 15 times its trailing earnings. By comparison, Coca-Cola stock trades at almost 24 times earnings. Therefore, Buffett's beloved Coca-Cola stock trades at a much higher valuation even though its growth is comparable to that of Coca-Cola Consolidated.
COKE Revenue (Quarterly YoY Growth) data by YCharts
In conclusion, returns for Coca-Cola Consolidated stock were driven by its business transformation. This was a special situation and unlikely to be replicated. So 1,000% returns over the next decade seem unlikely.
That said, Coca-Cola Consolidated stock is inexpensive, the business is stable, and the company is in its strongest financial position in decades. This limits the downside risk for the stock. And with strong positive cash flows ongoing, the company may have some optionality in the future to drive future returns. And that why I believe it's a better buy than Coca-Cola stock today.
