As an investment, you could say it’s ‘the real thing’. Coca-Cola (US:KO) may not be everyone’s drink of choice, but for investors on the lookout for quality and value over the longer term, the shares of the American consumer giant have a good deal to commend them.
In spite of regular predictions that it would go out of fashion, Coca-Cola has for decades ranked high among the world’s most valuable brands. Last year it was in sixth place, according to Forbes, behind Apple and Google but ahead of Disney, Louis Vuitton and McDonald’s.
The company saw off the threat posed by archrival Pepsi during the 1970s and 1980s, when ‘the real thing’ slogan featured heavily in campaigns. Famously, Warren Buffett, whose Berkshire Hathaway holding company is Coca-Cola’s biggest shareholder, was persuaded to switch a five-decade allegiance to Pepsi after having his first sweet taste of Cherry Coke in 1986.
More recently, Coke has survived the onslaught of flavoured waters and other healthier options.
Meanwhile, the group has added to its portfolio substantially, buying, among other things, the maker of Innocent smoothies and juices, ‘smartwater’ producer Glacéau and, almost six years ago, Costa Coffee from Whitbread for a cool £3.9bn.
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Financial fizz
Financially, over the past five years, groupwide sales have grown by 34% to $45.8bn, while last year underlying earnings before interest and taxes (Ebit) were up 36% to $13.3bn. Rampant inflation has played its part in the growth, and sales volumes have also been on the rise. This underscores not just Coke’s continued popularity but also the group’s pricing power.
Analysts see little sign of the business losing momentum. They have pencilled in Ebit of more than $15.8bn in 2026 – equivalent to annualised growth of 6% – on forecast sales of more than $51bn and a profit margin of 31%.
It could be argued that Coca-Cola’s US-listed shares have lagged the group’s wider progress. Despite the upbeat growth forecast, the valuation of 22 times forecast next 12-month earnings is below the average valuation for the period of 24 times. A 3.1% dividend yield is also expected.
Elite tipple
Coca-Cola’s strengths have not been lost on the world’s best-performing portfolio managers, some 15 of whom hold shares. These investors are among the top 3% of more than 10,000 equity fund managers monitored by Citywire. The high level of smart-money ownership has led to Coca-Cola being awarded a top AAA Elite Companies rating.
Top three Elite backers
Sources: Citywire/Morningstar, latest holdings data.
Qualities including a long and strong track record, a robust balance sheet and attractive valuation have encouraged one of these Elite Investors, Tom Hancock, to make the stock a top 10 position in his $9.5bn GMO Quality Investment fund.
‘It’s stood the test of time and, generally, our demeanour is to be respectful of companies that have a very long track record,’ Hancock said. ‘People’s loyalty to Coke is so high that it’s become a classic beverage. It’s unlikely there’d be any massive switching to a competitor.’
Timeless taste
There are always going to be challenger brands, but the group has taken intelligent steps to diversify into areas such as coffee, water and energy drinks. The group’s regular product variations, backed up by a fearsome marketing budget and presence on social media, ensure it remains in the public eye.
Although it is technically a defensive consumer staple, there is plenty of growth potential in Coca-Cola’s business lines. It is forecasting, for example, compound annual growth of 5-6% in the coffee market between now and 2027.
As well as the array of drinks it makes, it has several hundred partnership bottling and distribution deals and has taken steps to target the premium end of the market.
Net debts are comfortable at twice earnings before interest, tax, depreciation and amortisation, particularly given the company generates a huge amount of free cashflow. For many top investors it is ‘the real thing’, while the current price is an attractive entry point for this buy-and-hold favourite.
| Key facts – Coca-Cola Company | |||
|---|---|---|---|
| Market capitalisation | $271bn | Price | $62.88 |
| Net debt | $29.8bn | Net debt/Ebitda | 2.3x |
| 52-week high/low | $64.36 / $51.55 | Return on capital employed | 17.0% |
| F’cst price to earnings | 21.6 | F’cst dividend yield | 3.1% |
| F’cst EPS growth | 5.8% | 12-mth share price | 4.4% |
Source: FactSet, as of 15 June. EPS = earnings per share. Ebitda = earnings before interest, tax, depreciation and amortisation. Forecasts based on next 12 months.
A version of this article originally appeared in the Telegraph’s Questor column.
