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How Much Fizz Is Left in Coca-Cola Stock?

September 05, 2018

Brown sugary drinks are done — and unfortunately, the folks in Atlanta missed that memo so many years ago. The Coca-Cola Co (NYSE:KO) has for years ignored the massive change in consumer taste for its eponymous product. In the process, it withered away much of its investors’ opportunity for profits.

Revenues for KO stock’s core beverage products, which represent the majority of overall sales, continue to fall. The three-year average is a continued loss of 14.9%. For the past trailing year, that has accelerated to a loss of 15.4% in overall sales including for all of its somewhat diversified product mix that includes non-sugared drinks, water and teas.

But at the same time, since it costs generally little to put beverages into containers, its operating margin is still healthy at a current rate of 21.2%. That, however, is lost on the general returns for KO stock, as non-operational expenses wipe out that margin advantage. Returns on assets are running at a meager 2.6% and a return on its capital is sitting at an embarrassing 3.9%.

And shareholders are suffering for it. Over the past year as the general U.S. stock market has gained 17.9% as measured by the S&P 500 Index, KO stock has lost 1.2%.

Are There Any Positives for KO Stock?

Dividends haven’t been much of a case for patience at a mere 39 cents per share equating a yield of 3.5%. And shareholders shouldn’t be complacent about expecting that dividend to continue. The payout rate for the shares’ dividend is over 500%. And as a harbinger of doom, the company’s cash available to keep the dividend coming is running down, with cash required for the dividend sitting at a deficit of 10% and the actual coverage rate of cash generated by the company is running at a deficit of 80%.

Creditors should also be worried. While the current ratio is alright at 1.3 times, immediate credit coverage is now at a deficit, with the quick ratio sitting at 0.9 times.

Overall debts before the deal to acquire its pending deal in the coffee café business is now at 54.3% of assets. And its debt leverage against its equity value is a whopping 279.3%.

Shareholders who remain are gullible. The shares are valued at 10.5 times their book value and at 5.8 times its trailing and falling revenues.

Coca-Cola and … Coffee?

Now, about the coffee deal. The company is now waking up to smell the coffee about its post-cash-cow market for its fizzy drinks. So, it is proposing to buy the privately held Britain-based coffee café company, Costa Coffee.

This is not a good deal for KO stock investors. Coca-Cola knows little to nothing about running cafes and there are plenty of competitors in the space who will simply eat its lunch or breakfast. And why buy a coffee brand that is largely unknown in the U.S. with limited branding beyond Britain?

Coffee is a good market, but Coca-Cola should’ve known this years ago. It should’ve just developed and launched its own brand while it still had more cash and credit capability.

The fizz is gone for KO stock. Time to throw out the stock and recycle the bottles and what cash remains for something that has the real opportunity for profits.

Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.