Should I invest in Coca-Cola?

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There's no way you don't know the Coca-Cola Company but did you know that the company doesn’t bottle its own products? Coca-Cola is one of the world's most important stock market values, and its products are available on the shelves of every supermarket on the planet. It is also part of our culture and collective imagination through its representations in numerous films, songs, the sporting events it sponsors, and the many iconic advertisements featuring its red and black logo bottles.

But The Coca-Cola Company is not just about Coca-Cola. The company is a vast conglomerate with numerous beverage brands, from soft drinks to mineral water.

Yet, if Coca-Cola is everywhere and has seemingly always been there, does that mean it's worth investing in? Let's take a closer look.

How Coca-Cola's share price is evolving

The Coca-Cola Company is a so-called defensive stock. That is, it is a stock that provides regular dividends and stable earnings, regardless of the state of the overall stock market. There is a consistent demand for defensive stocks, so they tend to be more stable during different phases of the economic cycle, whether bullish or bearish.

You can see this in Coca-Cola's share price evolution over the last ten years. If you leave aside the month of March 2020, marked by a global drop in the markets, Coca-Cola's share price has been rising steadily and smoothly, although somewhat slowly.

If you had invested in the company a decade ago, in August 2012, you would have made money, as the company's share price has risen by around 55% since then. That means if you had invested €1,000 in The Coca-Cola Company back then, it would be worth around €1,550 today. The performance is good, but it is still well below the one the benchmark index of the largest US companies: the S&P 500. Over the same period, it has risen by more than 180%.

If investing in Coca-Cola does not seem to have been the best deal of the century in the long term, it is pretty different if you focus on a shorter period.

Since the beginning of the year, the company's shares have more than withstood the market fall. They could even be considered a safe haven in uncertain times. Since 1 January, The Coca-Cola Company is up almost 4%, compared to the S&P 500, which is down nearly 17.5%.

As I told you earlier, this evolution of The Coca-Cola Company's share price is typical of defensive stocks, the kind that Warren Buffet, founder of Berkshire Hathaway, is particularly fond of. As a matter of fact, Berkshire Hathaway is the largest shareholder of The Coca-Cola Company, with nearly 10% of the capital owned by the investment firm.

How Coca-Cola makes money

To learn more about how Coca-Cola makes its money, let's look at the company's Q1 2022 earnings report.

Coca-Cola is a successful company with a significant and steady profit increase over the years. For the first quarter of 2022, the soft drink giant posted a net profit of nearly $2.8 billion, up almost 24% compared to the same period in 2021. If you look back a little further, Coca-Cola's net profit increased by 135% between the first quarter of 2017 and the first quarter of 2022. This spectacular growth occurred despite revenues being roughly equal between the two periods, as they only advanced by 15% between Q1 2017 and Q1 2022.

You won't be surprised to learn that although Coca-Cola is present on every continent, its largest market is North America, where the company generates more than 30% of its sales. It's followed by Europe, the Middle East and Africa, Latin America and finally Asia-Pacific.

Most people do not know that the company does not actually bottle its products. Instead, it makes money through a unique business model involving two separate divisions: one that sells its syrups to bottlers and the other its finished products.

However, you can see that more than 20% of Coca-Cola's revenue in the first quarter of 2022 comes from its bottling investments. Weird, right?

In fact, Coca-Cola's business model is to support consolidation among its bottlers. That is because having many small independent bottlers as partners could potentially create many problems for the company. Small independent bottlers often lack the cash to continue their operations and finance their investments when they face economic obstacles, which could lead to financial problems for Coca-Cola.

The company responded by creating its Bottling Investment Group in 2006. This subsidiary identifies struggling franchisees and provides them with financial and institutional support. Once they have achieved profitability and stability, the company finds a qualified bottler to take over operations.

Low-risk, low-reward?

Coca-Cola is doing quite well, but what does the future hold for the company? Looking ahead, it will probably have to adapt to the new habits of consumers increasingly moving away from high-sugar soft drinks to healthier products. However, the company has already partly anticipated this shift by diversifying its product range to include mineral waters, among others.

That makes it almost the perfect defensive stock, practically impervious to the ups and downs of the financial markets. If you were to give it a risk rating, it would be among the lowest of the various companies you could invest in.

In a way, investing in Coca-Cola is the opposite of investing in cryptocurrencies. Here, we're not talking about a high-risk, high-reward investment. Instead, we're dealing with a stock that doesn't have an exceptional return on investment. But, while it doesn't historically offer big gains, it does provide a hedge against sharp market movements. As such, it could be part of a good portfolio diversification strategy.

Of course, there is no such thing as zero risk in investing, and the final decision is yours alone.

Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.