The Coca-Cola Company is expected to register top and bottom-line growth when it reportsfirst-quarter 2022 numberson Apr 25, before the opening bell.
Coca-Cola may reinforice its vast reach in the global soft-drink market by reporting strong high-single-digit organic revenue growth in 1Q, which it is expected to benefit from the reopening of on-premise venues such as restaurants and stadiums as pandemic restrictions ease. A favorable sales mix shift to these away-from-home channels may support gross margin, but higher input costs and greater marketing spending could reduce operating profitability, despite possible additional expense relief from the implementation of its sweeping reorganization in 2021.
It is expected management to address its March 8 decision to suspend its business in Russia. Together, Russia and Ukraine make up about 1% of Coca-Cola's consolidated net revenue and 2% of operating income.
Last Quarter Performance Review
Moving towards its upcoming Q1 results, it’s important to note that Coca-Cola is coming from a mixed Q4.
Revenues came in at $9.5 billion, nearly 11% higher versus Q4 2020. Specifically, organic revenues rose 9% year-over-year, supported by a 10% gain in pricing and mix, offset by a 1% reduction in volume. The highlight of Coca-Cola’s last report was that organic sales in EMEA leaped 17%, while North America also reported a bold 14% boost.
Regarding the overall product mix, Hydration, Sports, Coffee, and Tea sales rose 12% during the quarter, while Nutrition, Juice, Dairy, and Plant-Based Beverages gained by a satisfactory 11%. Surprisingly, Sparkling Soft Drinks also reported decent growth of around 8%. Hence, the company indeed experienced relatively strong growth levels across its portfolio of brands.
Key Points to Note
Coca-Cola’s results in the recent quarters have been benefiting from strategic transformation and ongoing recovery around the world. The company’s top line has been improving, owing to strength across the majority of the markets, investments in the marketplace and the cycling of last year’s pandemic-led impacts, which have been aiding volumes. Revenues are also expected to have gained from improved price/mix, driven by pricing actions in the marketplace coupled with a favorable channel and package mix due to the lapping of last year’s pandemic-led disruptions.
Continued volume gains in the trademark Coca-Cola; sparkling flavors; the nutrition, juice, dairy and plant-based beverages; and hydration, sports, coffee and tea categories are expected to get reflected in the company’s first-quarter results.
Additionally, Coca-Cola’s first-quarter results are likely to reflect ongoing gains from innovations and accelerating digital investments. The company has been witnessing a splurge in e-commerce, with the growth rate of the channel doubling in many countries. It has been accelerating investments to build strong digital capabilities. The company has been consistently strengthening consumer connections and further piloting various digital-enabled initiatives through fulfillment methods to capture the online demand, which are likely to have boosted first-quarter sales.
However, Coca-Cola has been witnessing pressures from higher supply-chain costs, including higher commodity input costs and transportation expenses. It has also been seeing pressures related to commodity and material cost inflation. The pressures from input cost inflation and other costs are likely to have hurt the performance in the first quarter.
Coca-Cola has been investing in its markets and brands to support sales growth, with higher spending on consumer-facing activities. This has led to higher marketing investments in the past few quarters. Higher marketing spending, and an increase in short-term incentives and stock-based compensation are expected to have led to increased selling, general and administrative expenses in the first quarter.
The Coca-Cola Company is often praised for its lengthy shareholder capital return history, including 60 years of successive annual dividend hikes. Hence, the company boasts the title of Dividend Aristocrat. Two months ago, in fact, the company announced its 60th annual dividend hike, with the dividend growth starting to reaccelerate.
While Coca-Cola is likely to continue growing its capital returns for decades to come, I remain cautious of the stock’s current valuation multiples relative to the company’s rather underwhelming growth prospects.
Accordingly, I am neutral on the stock.
The Effects of the Ongoing War on Margins
That said, there are some headwinds to consider. Coca-Cola’s operating margin in Q4 came in at 22.1% on an adjusted basis compared to 27.3% in the prior-year period. This was due to significant marketing investments. Further, last month the company announced it had suspended its operations in Russia amid the Russia-Ukraine war.
As a result, it’s quite likely that this will have an effect on Coca-Cola’s international sales and, consequently, on margins. Coca-Cola’s operations in Russia and Ukraine made up around 2% of the company’s net operating revenue last year, which may sound like a miniature number.
However, we need to consider Coca-Cola’s production in the country as well. In the first half of last year, Coca-Cola produced 1.35 billion liters of beverages at 10 plants in Russia. Thus, combined with Coca-Cola’s efforts to increase its production in other countries to compensate for this loss of product, it’s quite likely to see operating margins compress further in the short-to-medium term.
Another hit in profitability in the company’s upcoming results could stem from the overall rise in costs amid elevated inflation levels. In March, U.S. monthly producer prices (PPI) rose by the most it has increased in more than 12 years. It accelerated from last month to 11.2% year-over-year.
Thus, considering that Coca-Cola is unlikely to raise prices that much, the ongoing inflationary environment could negatively impact the company’s margins too.
Can the Dividend Grow Faster?
Coca-Cola has managed to unfailingly increase its dividend payments for decades. As mentioned earlier, the company recently celebrated its 60th annual dividend increase, which was at a rather surprising rate, to their credit. The 4.8% increase was the highest since 2018 and higher than its eight-year dividend per share CAGR of 4.68%, which could indicate an acceleration in dividend growth.
Remember, however, that Coca-Cola has recorded a relatively stagnated net income over the past decade, with any per-share net income increase primarily backed by stock buybacks during this period.
As Coca-Cola continued to hike its dividend during these years while its earnings stayed fixed, the payout ratio gradually squeezed. The dividend, in fact, comprised the majority of net income over the past few years and even temporarily exceeded net income levels during the pandemic.
One argument here could be that excluding depreciation, amortization, and other non-cash items, the payouts could be better covered by Coca-Cola’s free cash flow. The company needs to cover dividends of $1.76 (DPS) times 4.3 billion (shares outstanding) = ~$7.56 billion. Thus, management’s free cash flow outlook of $10.5 billion for the year should sufficiently cover the dividend.
Overall, I have mixed feelings about Coca-Cola’s dividend. On the one hand, earnings could potentially be squeezed in the coming quarters following the situation in Ukraine.
On the other hand, the latest dividend hike’s pace points in the other direction. In any case, I doubt the company will not resort to slowing down dividend growth going forward if earnings don’t expand faster in the near term.
Wall Street’s Take
Coca Cola's revenue in the first quarter of 2022 is expected to be $9.836 billion, the adjusted net profit is expected to be $2.512 billion and the adjusted EPS is expected to be $0.581, according to Bloomberg's unanimous expectation.
Turning to Wall Street, Coca-Cola has a Moderate Buy consensus rating, based on 10 Buys and four Holds assigned in the past three months. At $67.71, the average Coca-Cola price target implies 4.4% upside potential, according to TipRanks.
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