Skip to main content
yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

I'm not going to sugarcoat this or try to artificially sweeten my message: I'm not happy with how my Coca-Cola investment has been performing.

Since I first "bought" the shares for my Strategy Lab model dividend portfolio in September, 2012, the price has risen about 9 per cent. Coke's total return, including dividends, was about 16 per cent.

That seems like a solid performance, until you compare it to the S&P 500's total return of more than 50 per cent over the same period. In other words, I would have made triple the return by simply buying a low-cost U.S. index fund.

On a less gloomy note, thanks to the plunging loonie, the price of my Coke shares has soared nearly 40 per cent in Canadian dollars. This unexpected currency windfall would also have applied to a U.S. index investment, of course, but it does make it easier to swallow Coke's underwhelming performance.

But that's all sugary water under the bridge. What matters now is how I expect Coke to perform in the future. After reading through Coke's year-end earnings release and poring over analyst reports, I am concerned – not just about the soft-drink giant's ability to return to the strong growth of previous years, but also about the possibility that the Canadian dollar could rebound and wipe out my paper gains from the falling loonie.

Let's look at Coke's fundamentals first.

It's no secret that these are challenging times for the pop industry as consumers become more health conscious. Measured by volume, Coke's sales of carbonated beverages rose just 1 per cent globally in 2014, with outright declines in Europe and North America and zero growth in Latin America.

The good news is that Coke's "still" (non-carbonated) beverages – such as ready-to-drink teas, sports drinks and waters – performed better, posting a 4-per-cent gain that led to a 2-per-cent increase in volume over all. The bad news? Still beverages account for just one-third of Coke's total volume, which means carbonated drinks remain Coke's biggest category by a two-to-one margin and will almost certainly present a headwind for years to come.

Predictably, Coke's financial results have also lost their fizz. Net revenues fell 2 per cent in 2014, and while the drop was largely a reflection of the strong U.S. dollar, the company has failed to generate meaningful revenue growth since 2011. Earnings have also stagnated; operating income dropped 5 per cent in 2014, but would have risen by mid single digits after adjusting for one-time items and currency changes, Coke said.

The company expects similar earnings growth in 2015, which CEO Muhtar Kent called a "transition year as the benefits from … announced initiatives will take time to materialize amidst an uncertain and volatile macroeconomic environment."

Among those initiatives, Coke is boosting ad spending while streamlining its operations – including up to 1,800 layoffs announced in January – as part of a plan to save $3-billion (U.S.) annually.

But Coke's growth problems aren't the only thing that trouble me as an investor. There's also the stock's valuation.

Normally, a company facing these sorts of challenges would trade at a suitably low valuation. Not Coke; it still commands a multiple of nearly 21 times estimated 2015 earnings – near the high end of its five-year range and well above its five-year average of 18.6. This seems unwarranted for a company whose best days may well be behind it. Granted, Coke's dividend keeps rising – it is expected to announce an increase any day now – but a growing dividend alone isn't sufficient reason to buy a stock. The rest of the business has to be firing on all cylinders, too.

But there's one more reason that, as a Canadian investor, I am cautious on Coke.

When I "bought" my shares, the Canadian dollar was trading at about $1.03 (U.S.). Because the risk of the loonie moving appreciably higher seemed small at the time, I was comfortable buying Coke. Now, with the Canadian dollar trading at less than 81 cents, I don't have the same comfort level.

I could probably live with Coke's growth struggles if that were the only factor at play here. After all, the company has an unmatched brand portfolio, impressive marketing muscle and a powerful global distribution system. I could also overlook the high P/E, or the currency risk to my portfolio, if those were isolated factors.

But an investment in Coke comes with all three risks – slowing growth, high valuation and potential currency volatility. That's why I have decided to pocket my Coca-Cola profit, both personally and in my model portfolio, and look for a better opportunity elsewhere.