Coca-Cola Consolidated (COKE +2.24%) is a relatively obscure bottling company that primarily makes and packages beverages for The Coca-Cola Company. But its obscurity is a shame, considering it's been one of the best stock performers of the last decade.
Shares of Coca-Cola Consolidated are up more than 1,100% over the past 10 years, far outpacing the 184% return for the S&P 500.
Unfortunately for investors today, much of the gains for Coca-Cola Consolidated were driven by a special situation -- and it's unlikely to happen again.
Here's what happened: From early 2013 to late 2017, Coca-Cola Consolidated -- under the direction of The Coca-Cola Company -- acquired various distribution regions and manufacturing facilities. This drove top-line growth that's hard to come by in this business.
Profit margins took a backseat to Coca-Cola Consolidated's business while management restructured everything. But once the work was done, profit margins bounced back in a big way. The company's diluted earnings per share (EPS) are up more than 1,500% over the last 10 years.
COKE EPS Diluted (TTM) data by YCharts
This level of EPS growth isn't normal for Coca-Cola Consolidated because it's a low-growth, low-margin business. In 2023, for example, the company's net sales were only up 7% year over year and its diluted EPS dropped modestly -- investors should expect years like that in this business.
All of this said, Coca-Cola Consolidated's management has a head-turning plan to boost EPS in 2024 and beyond.
Here's how much stock Coca-Cola Consolidated is buying back
On May 6, management for Coca-Cola Consolidated announced a stock buyback plan worth $3.1 billion. The company actually plans to buy shares from The Coca-Cola Company and one of its subsidiaries, and the details are a little complicated. But suffice it to say that this plan is huge, considering that its market capitalization is slightly less than $9 billion as of this writing.
In other words, Coca-Cola Consolidated plans to repurchase roughly one-third of its shares. That's one of the biggest plans I've ever seen.
NASDAQ: COKE
Key Data Points
Here's how a stock buyback plan can benefit shareholders: When a company's earnings stay the same but the number of shares goes down, EPS goes up. And higher EPS warrants a higher stock price.
This is noteworthy given the context I already provided. Coca-Cola Consolidated's EPS is up big in recent years thanks to a special situation. But now that this is over, EPS growth will be hard to come by organically. That's why share repurchases can be one of the things that can move the needle.
Is this good for shareholders?
Coca-Cola Consolidated doesn't have $3.1 billion just sitting under its mattress. CEO J. Frank Harrison III said the company will "optimize our balance sheet by raising a prudent amount of debt in order to return cash to stockholders." In other words, it's in good financial shape, and so it will borrow the money to reward shareholders.
I prefer no-debt companies whenever possible. But I'll readily admit that using debt to repurchase shares is a tactic that's worked for other companies. A good example of this is Apple. It was only a little more than 10 years ago when it had zero debt, compared with debt of over $100 billion today. But ever since it added debt to the balance sheet, the stock is up around 900%.
Therefore, as long as Coca-Cola Consolidated keeps its debt at "prudent" levels, as Harrison said, this could be a good move for shareholders. Indeed, I can see the stock rising over the near term as a result of this move.
That said, I do question the long-term goals for the balance sheet from Coca-Cola Consolidated's management. Just six months ago, management celebrated having more cash than debt for the first time in 40 years. Now, it will undo that by taking on a large amount of debt.
I like Coca-Cola Consolidated's business -- it has competitive advantages because it owns distribution rights for popular beverages. Consumer demand is fairly constant. And although profit margins aren't eye-popping, investors can expect consistency.
But it will be tough for Coca-Cola Consolidated to find growth, and that's the only thing that gives me pause with the stock today when thinking beyond the near-term catalyst of the share repurchase plan. If it traded at a bargain, it could be worth picking up shares of this reliable business. But trading at nearly 20 times earnings, the stock may be priced a little high for a low-growth opportunity.
