Why Coca-Cola Is Still A Buy, Even Without The Recent Cannabis Buzz
Investing.com | Sep 24, 2018 06:48
Coca-Cola (NYSE:KO) has been on the hunt for the next big thing to create excitement—and of course drive additional growth—for investors. Two recent developments, one still only a rumor, could be just the fuel the company, and its rangebound stock, need.
Shares of a Canadian marijuana producer, Aurora Cannabis (OTC:ACBFF), jumped 17% on September 17 after Bloomberg reported that Coke was in talks with Aurora to explore the possibility of creating cannabis-infused drinks. Though both companies neither confirmed nor denied the news, their statements left investors guessing...and intrigued.
Coke said it is "closely watching" the growth of CBD, a non-psychoactive component in marijuana, as an ingredient in what it called functional wellness beverages. "The space is evolving quickly," Coke further noted, though, "no decisions have been made at this time." CBD, which does not produce a high for the user, has been used for medical purposes, including easing inflammation, pain and nausea.
Prior to jolting the highly speculative marijuana market, Coke created ripples in the fiercely competitive coffee market when it announced last month that it was acquiring UK-based global coffee chain Costa for $5.1 billion. This was Coke's biggest acquisition in eight years. The deal sent shares of Costa's parent company Whitbread PLC (LON:WTB) soaring. The stock gained 19% on August 31, the biggest jump in two decades.
h3 Mid-Turnaround, Brand Headwinds Still Keeping Stock Rangebound/h3Despite these headline-grabbing developments during the past few weeks, Coke shares continue to trade within a range. The stock closed at $46.58 on Friday, slowly moving towards the 52-week high of $48.62 hit early this year. The biggest reason for this lackluster performance is that the world’s largest beverage company is still in the middle of a turnaround effort, as customers are altering their food and beverage choices.
Consumers are shunning surgery sodas, shifting to healthier drinks. That headwind is so strong that it’s rattling many established brands and slowing sales growth. Over the past few years, Coke has been working to reduce the amount of sugar in its flagship drinks, while adding a variety of low- and no-sugar alternatives, including soy-based beverages, teas, waters and juices, as a way to revive sales that have been declining since 2012.
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Since James Quincey took over as chief executive officer in May 2017, he's been cutting costs and restructuring the company’s beverage offerings. His campaign appears to be taking shape, and paying off. In the company's second quarter earnings report, Coke's sales and profit beat analyst estimates, as the rebranding of Diet Coke and a double-digit jump in Coca-Cola Zero sales boosted results. “We’re winning in the marketplace so far this year and our strategy’s on track,” Quincey said on a call with analysts after the earnings release in late July.
Bottom Line
Despite its current challenges, Atlanta-based Coke remains a solid dividend stock for long-term investors. The company has increased its dividend for 56 years in a row. That's more than enough confirmation of the strength of the 21 brands it owns which generate $1 billion or more in annual sales, (out of a staggering 500 brands globally).
Trading at $46.49 a share as of Friday's close, with an annual dividend yield of 3.39%, now is a good time to bet on Coke's turnaround. This is especially salient after its Costa deal, which opens another door for the company’s long-term growth in the most robust category of non-alcoholic beverages. With its 3,800 stores, Costa provides Coke a global retail presence and a hedge against slowing soda sales.
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