The Coca-Cola Co (NYSE:KO) has yet to sparkle under new CEO James Quincey, who took over in August.
Analysts are expecting earnings of 38 cents per share, and hoping for 39 cents, on revenue of $7.36 billion when the Atlanta company reports on February 16. That would just clear the company’s dividend of 37 cents per share, which is the only reason to hold the stock.
Coca-Cola shares have gone nowhere during the current recovery, a gain of 46% being less than half the average S&P stock’s 97%. But that dividend — which was held through the Great Recession and has since nearly doubled, while the stock even split 2:1 in 2012 — has kept investors warm.
But Quincey faces both expected and unexpected problems, which could have some long-time shareholders preparing to bail on the shares.
Expected vs. Unexpected Problems for KO
Some of the problems are expected. Doctors and environmentalists both dislike Coke, the former for its sugar, the latter for its plastic bottles. For the doctors there are smaller bottles and cans, at higher prices. For the environmentalists, there is a plan to fully recycle its plastic bottles.
Quincey admits the company has to experiment, relying more on water, juices and teas for growth instead of sugar. It has changed the look of its cans, making them thinner, it’s seeking to buy brands around the world like Chile’s Topo Chico mineral water and its Super Bowl ads recently used gender-neutral pronouns.
But that may not be enough. Rising inflation and higher interest rates make even a 3.27% dividend yield less attractive, and U.S. trade policies have Quincey worried. Coca-Cola has always ridden America’s reputation in its branding, and as that takes a hit, so does Coke.
More Than Tweaks for KO
Quincey has talked about acting like a tech company, being willing to make mistakes and correct them rather than evolve cautiously as it has ever since the “New Coke” disaster of three decades ago.
But that may not be enough. Coke has long been a dividend monster , pushing out even more than its net income to shareholders. That made it a good conservative investment when interest rates were falling, as they have been since the early 1980s. But when interest rates are rising dividends become less interesting, and growth must stay ahead of inflation.
Coca-Cola, however, has been shrinking, pushing out more work to its bottlers in a bid to maintain its margins, which bring about 15% of revenue to the net income line. It has also been steadily increasing its debt load, which now tops 50% of assets.
The corporate ship has been leveraged to succeed in economic conditions that may no longer apply. The company was regularly bringing in $10 billion of operating cash flow under former CEO Muhtar Kent, against a market cap that is currently near $184 billion. Quincey’s summer quarter saw that balloon to nearly $6 billion. But some analysts are calling this a “do or die” quarter as it seeks to maintain the pace.
Can Quincey Turn KO Around?
Quincey is faced with the daunting task of turning around the Coke ship in turbulent waters. Kent has set a course that lets it maintain the dividend while its top line shrinks, and that’s not going to be good enough if interest rates keep rising, making bonds more attractive, and global trade starts shrinking.
Coca-Cola has an above-market price to earnings ratio, pays a steady dividend that is becoming less valuable, sells an American brand name when that is less popular, and is known for selling products blamed for the obesity epidemic.
Quincey has his work cut out for him. I wouldn’t buy Coke right now, and I live in Atlanta.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
