Blue Chips to Pass On: Coca-Cola (KO)
Much like McDonald’s, Coca-Cola (KO) is a company that is synonymous with globalization and American consumerism.
But also like MCD, Coca-Cola faces serious challenges thanks to market saturation and changing consumer tastes.
KO revenues grew just 3% from 2011 to 2012 and actually declined from 2012 to 2013. Analysts are predicting a return to revenue expansion in 2014, but Coca-Cola is looking at low-single-digit growth at best.
Why? Well, Coca-Cola is quite literally almost everywhere with 500 brands in 200 countries. It’s actually easier to list the places Coke is not a player then where it has a footprint. That’s good for stability, but short of space exploration shows that Coca-Cola is very limited when it comes to opening new markets.
Sure, Coke could branch out into new products as it looks to do with a recent partnership with Green Mountain (GMCR) of Keurig coffee maker fame. However, even if Coca-Cola does branch out into in-home beverage gadgets, it will take a whole heck of a lot to move the needle for a $165 billion company with almost $50 billion in annual revenue.
Throw in the fight against sugary soft drinks, and there’s a pressing need to figure out the next step for Coca-Cola. After all, its branding is completely tied up in its namesake drink … which remains in the crosshairs as sodas become unpopular among health-minded Americans.
Now, Warren Buffett has held KO stock for decades and there’s clearly a benefit to hanging on if you have been a longtime shareholder. But for new money, don’t bother.
The 3.2% yield at current pricing is nice, but Coke is already paying out more than half of earnings via dividends. KO bumped its quarterly payment a mere 10% in each of the last two years, so investors better be patient if they expect any significant dividend growth.
And considering Coke is up a measly 20% or so in the last 15 years, investors shouldn’t expect much on the share appreciation side, either.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.