Coke Adds Value

 | Apr 16, 2014 | 2:50 PM EDT  | Comments
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What is a value stock? What is a company that goes up in the face of market headwinds and does well despite worldwide weakness? What company can separate itself from the pack and attract money managers to its shares? What's the polar opposite of aggressive growth?

If you want to know what value is, simply look at the amazing quarter Coca-Cola (KO) delivered and read the commentary about what Coke's doing to reward shareholders.

First, good value stocks like Coca-Cola are all about cash management. "We follow disciplined guidelines for how we use our cash to create sustainable shareholder value," says Gary Fayard, Coke's excellent chief financial officer who is soon retiring after 14 years. "First we are reinvesting in the business to further strengthen the equity of our brands and accelerate growth."

Coke sure did, with phenomenal growth in the BRICs (remember them?) -- Brazil, Russia, India and China. Coke did so with excellent advertising spending and has indicated that it isn't done ramping up spending. Sure, North America and Europe were weak, but Coke is spending where the growth is and that makes a ton of sense. It is also innovating -- like the cool, eye-grabbing aluminum bottle supplied by Alcoa (AA).

Second, the company by its own admission pays "a heady dividend" -- $1.22 per share, a 9% increase over last year. As the company points out, "We 've increased our dividend every year for more than half a century." What high-growth stock can lay claim to that accomplishment? Try none.

Third, the company continually makes strategic acquisitions, bolt-on acquisitions and value-added joint ventures. Here's where the classically intriguing stake in Green Mountain Coffee's (GMCR) Keurig comes to mind. According to Fayard, it "opens up an exciting new packaging format for our brands." That stake continues to pay dividends for the company, especially because it blocks out all others who want to do an end-run around Coke.

What does meaningful mean? How about generating $1.1 billion in cash from operations and net share repurchases through the first quarter of $713 million?

Notice that none of these uses of cash are, per se, incredibly dynamic. There's nothing done with an eye toward reinventing the company. It is all blocking and tackling, the basics of good business. When something happens that's not so good, Coca-Cola puts resources behind it to fix it. There's no "Hail Mary" pass for these guys.

Of course, there's also reckless insider selling and no venture capitalists who have to get out in order to show returns. Instead, there are the likes of Warren Buffett, a huge shareholder, who has to love everything he heard on the call.

I am not necessarily crazy about the stock because I am not sure about the long-term growth of carbonated soda, in part because I think the developed world sees the potential ills in both the regular and diet versions, from obesity concerns to worries about what the chemical ingredients will do to their bodies.

However, this quarter gives me the confidence to recognize that Coca-Cola sees what has to be done in the right markets, and it will be economical and efficient in doing so.

That's what value means. I think value always has a place in any diversified portfolio and if Coca-Cola ever sells off here, I have to admit that as much as I don't like to drink it, I would like to own it.

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