The Coca-Cola Co (NYSE:KO) has had quite a rough go of things lately. Shares are largely flat over the last year vs. a roughly 12% gain for the S&P 500, and are actually down since April 2013 despite a 35% rally for the broader market.
That’s because revenue has pretty much gone nowhere for Coca-Cola, and investors have been worried that the soft drink giant will never break out of its rut.
Thankfully, KO stock saw its sales move up in its Q1 earnings report this week. It was the first revenue rise in nine quarters, and Coca-Cola actually beat earnings expectations as a result.
But I don’t think this is necessarily a sign for investors to breathe a sigh of relief. Because in the details of the Coke earnings report was a disturbing sign for the soda giant, as one of its most iconic products — Diet Coke — saw sales plunge 6% globally last quarter.
KO Stock and The Death of Soda
Coca-Cola is really caught between a bunch of changing tastes and behaviors, none of which bode well for the soft drink giant.
Many North American consumers see soda as an undesirable beverage in the age of diabetes and a focus on replacing processed foods and sugars with natural and healthy options. While Diet Coke does technically count as a healthier option, increased scrutiny on artificial sweeteners makes the cola a non-starter for some health-conscious consumers.
It all adds up to 10 straight years of declining soda sales across all brands and flavors.
Another problem for Coke is that consumers have demanded a wide array of options and variety, and Coca-Cola may actually be cannibalizing its Diet Coke sales with offerings like Coke Zero. That’s fine if it’s a net positive, as it was this quarter, but it damages brand loyalty if it makes switching from your favorite cola easier to do.
KO has managed to plug the gap with sports drinks and bottled juices as a path to growth, and is increasingly focused on energy drinks thanks to a partnership with Monster Beverage Corp (NASDAQ:MNST) that has resulted in increased buyout speculation.
But it might not be enough to swim upstream in a market that has been moving away from soft drinks, especially when the flagship product is full-calorie cola.
Coca-Cola Lags Its Peers
All soft drink manufacturers have been in a similar situation, but Coca-Cola seems to be struggling more than others to adapt — in part because of its massive scale and reliance on a mature business.
According to reports, PepsiCo, Inc. (NYSE:PEP) saw its eponymous full-calorie cola actually topped Diet Coke’s market share — the first time it has done so since 2010, putting it right behind the flagship Coca-Cola line. And as for PEP stock, shares have actually beaten the market in the last 12 months with compared with KO stock underperforming.
And Dr Pepper Snapple Group Inc. (NYSE:DPS), while just $15 billion in market capitalization vs. $145 billion for Pepsi and $180 billion for Coke, has actually soared 50% in the last 12 months on strong performance.
So while KO stock remains one of Warren Buffett’s favorite stocks, with his Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) owning 400 million shares for nearly 10% of the company’s common stock, there are serious signs of concern.
Sure, a 3.2% dividend is nice and that payout is quite sustainable at roughly 60% of earnings. But how much dividend growth is ahead amid stagnant sales and profits? And should investors really settle for a flat consumer stock when they can find growth elsewhere with almost the same current dividend potential — and a chance of more significant income as distributions grow over time?
I personally think Coke is a stagnant brand that may see stability but won’t keep up with the market going forward. Even if KO stock holders approve a buyout of Monster or some other deal, the cost of such a transaction at all-time highs for the market and amid global competition and changing tastes means success is anything but guaranteed.
If you own Coke with a good cost basis and plenty of income potential, by all means hang on.
But new money should look elsewhere.
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.