The Coca-Cola Co (NYSE:KO) on Wednesday offered up a second-quarter earnings report, and KO stock was down as a result. But while this isn’t the greatest news for Coca-Cola, this is music to the ears of any buy-and-hold investors out there.
CEO Muktar Kent blamed the high value of the dollar for Coca-Cola’s lackluster performance and said KO now expects organic revenues to be up 3% for the year. On a constant-currency basis, Coca-Cola expects earnings growth of 6%-8%, which is in line with its targets.
What had KO stock selling off, however, was the net operating revenue number, which at $11.539 billion was down 5% from last year’s $12.156 billion and just shy of expectations for $11.6 billion. They also focused on Coca-Cola’s lower revenue forecast, which had previously been for growth of 4% to 5%. The company expects earnings per share to be down 4% to 7% in 2016 from last year’s $2 per share.
To those trading KO stock, all that meant sell, sell, sell. But what about to an investor?
The Fizzy and the Still
It is wrong to think of Coca-Cola merely as a maker of sugary sodas. For over 90 years, it has been a leader in water purification — technology originally created to make all its sodas taste the same but now an essential health benefit. Among its non-soda brands are Dasani water, Odwalla juice drinks and Minute Maid orange juice.
The company’s results are often a mirror of the global economy. For the second quarter, business picked up in Eurasia and Africa, compared with the first quarter, but still is down for the year. Cost-cutting enabled the company to report $2.859 billion in operating income for the quarter, against $2.535 billion last year, even while revenues were down everywhere but North America.
This all filtered to adjusted earnings of 60 cents per share, which beat out analysts’ expectations for 58 cents.
The Yield Stays Strong
Coca-Cola is not known as a growth stock, although KO shares have doubled since the market bottom in 2009. What investors look for out of the company are steady, growing dividends, and the slight change in earnings — even the earnings trajectory — should not threaten the current 35-cent-per-share payout. At its closing price Tuesday of $44.88, that came to a yield of 3.1%, and the lower opening should even push that up a bit.
For a conservative portfolio, focused on income, those are attractive numbers.
An Options Treat for Bears
While investors will see little that is troubling in the second-quarter earnings report, traders were able to find a profit in put options — bets that a company’s stock will fall. Before the earnings announcement, there was heavy volume in January 2017 put trades betting that KO stock would fall.
Analysts remain generally bullish, however, with slightly more than half calling the stock a “buy,” and the rest calling it a “hold.”
KO Stock vs PEP stock
What many small investors want to know is, how is Coca-Cola holding up against its rival, PepsiCo, Inc. (NYSE:PEP). The answer there is “not great.” So far in 2016, KO stock is up 4.5%, but PEP shares — which pays a smaller yield at 2.8% currently — are up 8.3%.
This will not thrill Warren Buffett, whose Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) owns 9.3% of the company, but Buffett has been in Coke since the late 1980s and has little to complain about. Longer-term, Coca-Cola is doing just fine, beating Pepsi on a total return basis, averaging 10.4% annually to PEP’s 8.5%. Also, Buffett bought some of his shares at a pre-split price of about $3 at present prices, so his yield on that dividend is over 10%.
This illustrates the important point about Coca-Cola for investors. KO stock probably isn’t going to make you much on shorter-term swing trades. Coke is a steady long-term investment.
Buying and holding works.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
