Essay Example: Analysis of the Coca-Cola Company

2021-06-04 21:30:24
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The Coca-Cola Company is a leading global beverage producer and distributor. The company's major brands are Coke, Sprite, and Fanta. As of December 2016, Coca-Cola had owned over 500 beverage brands which are non-alcoholic. Its principal competitors include PepsiCo, Nestle, Unilever, Dr Pepper Snapple Group and The Kraft Heinz Company among others. I have chosen to do an analysis of Coca-Cola firstly because it is the leading beverage manufacturer and distributor thus there is a high expectation for this stock. Secondly, being global an effect on its share price is felt globally. Thirdly the opinion of analysts that investors should continue holding the share despite the continuous slump in the company's sales. 12 analysts advised investors to hold the stock three months ago while the advice was maintained a month ago by 14 analysts. Information from 15 of the 26 analysts was that the current shareholders should continue holding the share (Wall Street Journal, 2017).

Analyst advised that existing shareholders should maintain their investment in the company however they gave a warning that new investments in the stock should be discouraged (Barrons, 2017). My advice to potential investors is to buy since Coca-Cola has a long dividend history having paid increasing annual dividend payments for over fifty years even when there was a financial crisis. Also, Coca-Cola is moving away from the dependence on soda after their possible ties to obesity and diabetes through diversifications. With its most sophisticated distribution system for beverages, KO will increase sales through new varied brands such as the new Fairlife milk brand. Also, investors can buy the KO stock which will provide a diversifying impact on their existing portfolios.

An investment in KO is a high-risk investment due to its high volatility and liquidity. Globally, Coca-Cola leads in the manufacturing and distribution of non-alcoholic beverages serving more than 200 countries. As of the year ended 31, December 2016, KO had an asset base and market capitalization of $87,270M and 187,226M while its closest competitor PepsiCo had $69,667M and $166,182M respectively. Coca-Cola commands a high market share of 42.8% while its arch-rival PepsiCo has a 31.1%.

Coca-Cola has been growing and continues to grow despite the recent health concerns about high sugar consumption from sodas leading to declining sales. KO has grown from a single brand to over 500 brands and 3,500 products and continue to grow through diversifications. New products include ready to drink coffee Gold Peak, organic juices, smoothies and Fairlife milk. Other forms of growth include acquisitions such as the minority stake in Monster Beverage.

Profitability is a critical parameter since it indicates the ability of an entity to make profits from its primary business. Coca-Cola has been profitable having reported $6,527M in 2016 although it was a decline compared to the $7,351M published in 2015. Over the period 2012 to 2016 the company reported a high gross profit margin of between 60-61% for each of the years indicating it has been profitable and maintained stable profits. Operating profit margin for the company in 2016 was 20.61% a slight decline compared to 19.7% in 2015. The two, however, were a representation of deteriorated operating profit margins since years 2014, 2013 and 2012 all had profit margins above 21%. In 2016, Coca cola's net profit margin improved from 15.43% in 2014 to 16.6% in 2015 but however deteriorated in 2016 reaching a high of 15.59%. Return on investment in 2016 was 28.3% just a slight decline from 28.77% in 2015. The return on assets improved from 7.7% in 2014 to 8.16% in 2015, however, the ratio deteriorated to 7.48% in 2016.

The price-earnings ratio indicates the value paid for every dollar in per share earnings. A high price-earnings ratio is good for a company since it shows growth prospects for the stock, higher payout ratio, and lower risk. Also, the high ratio indicates confidence in the future of an entity (Heisinger, 2010, p. 645). As of 18th April 2017, Coca Cola's stock was trading at $43.48 while the earning per share was $1.50 (Wall Street Journal, 2017). Therefore the price-earnings ratio was 28.99. As of December 2016, the price-earnings ratio was 27.83 which was an improvement from a similar period in 2015 when the ratio was 25.72. Coca Cola's P/E ratio has been high for the last three years implying the stock is overvalued. Consequently, the shareholders have high expectation for increased earnings from the firm (Heisinger, 2010, p. 645).

There is no set standard for a company's P/E ratio. However, the definition of either high or low price-earnings ratios is in relative terms. Therefore the significance of a company's P/E ratio can only be determined by comparing it with the price earnings ratio of similar firm or competitors. As of 18th April 2017, close rivals PepsiCo and Monster Beverage had price earnings ratios of 26.1 and 37.89 respectively (Wall Street Journal, 2017). Monster's PE ratio of 37.89 and Coca Cola 28.9 was above the industry average of 28.The higher ratio for Monster implies that it offers superior growth prospects than Coca Cola which offers a slightly lower risk proportion but higher dividend yield.

The dividend yield is an indication of the amount of cash dividends that a company pays relative to the price of the share. This ratio is important for investors seeking income in the form of cash flows without the need of selling the share. Coca-Cola paid dividends of $6,043M, $5,741M, and $5,350M for years 2016, 2015, 2014 respectively (Coca Cola 2017). Annual dividend paid to investors for the year 2016 was $1.4 per share which was a 6% increase from 2015 when the company paid $1.32 per share which was also an 8% increase from $1.22 per share paid in 2015. For the three years 2016, 2015 and 2014 respectively KO had dividend yields of 3.2%, 3.1%, and 2.7% respectively (Coca Cola 2017). Coca-Cola has paid an increasing annual dividend to its shareholders for over half a century an indication it's a good company for investing.

Coca Cola's uses the initials KO as its stock ticker for trading on the New York Stock Exchange where it is listed. My advice to potential investors is that they should invest in this stock because there is potential to earn from its earnings due to its growth potential. Coca-Cola still commands a high share of the market while the beverage industry has future growth prospects. Coca-Cola has also diversified its product line to shield decline in sales from the declining soda consumption owing to health concerns. KO has continuously increased its dividends payments to its investors for more than half a century. Coca-Cola has also made management changes with the current CEO expected to leave the company amongst other internal changes with a view of focusing its business on research and development, innovations and technology. The changes place the company in a stronger position for continued international growth. These events show Coca-Cola has a future and potential investors should put their money on the stock.

References

Barrons. (2017.). No new investments in coca-cola. Retrieved from http://blogs.barrons.com/stockstowatchtoday/2017/01/19/coca-cola-no-new-money/

Coca-Cola. (2017). The Coca- Cola company 2016 annual report. Retrieved from http://www.cocacolacompany.com/content/dam/journey/us/en/private/fileassets/pdf/investors/2016-AR-10-K.pdf

Heisinger, K. (2010). Essentials of managerial accounting. Mason: South-Western Cengage Learning.

Wall Street Journal. (2017, April 15). Analysts rating Coca-Cola. Retrieved from http://quotes.wsj.com/KO/research-ratings

 

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