There are many well-known listed companies in the US stock market, coca-cola (KO.US) is one of them. This company, established in the last century, has been listed on the US stock market for over 100 years, and its stock price has increased tens of thousands of times since going public.

The long-term stable operation of coca-cola has also attracted the attention of many institutional investors, including Warren Buffett. In 1988-1989, Buffett's Berkshire Hathaway successively bought around $1 billion worth of coca-cola stocks, directly becoming the company's largest holding at the time, which they still hold today. It remains Berkshire Hathaway's fourth largest holding to this day.

On October 23rd, Coca-Cola will release its latest performance report. Every time the company announces its performance, it may also represent a good trading or investment opportunity. Prior to that, investors need to understand how to interpret its performance.

Can Coca-Cola's steady performance continue? What aspects do we need to focus on in terms of performance? Let's focus on 3 aspects: operational stability, brand moat, and dividends and buybacks.

1. Operational Stability

Buffett once said, the best businesses are those that, in the long run, do not require additional large-scale capital investments but can maintain a stable high return on investment. This is a measure of operational stability.

The business model of Coca-Cola is very simple, mainly producing beverage concentrates and selling them to bottling plants, as well as conducting marketing and brand promotion. Specific stages such as canned production and transportation are handled by cooperating bottling plants, requiring minimal capital investment. With the strong brand influence of Coca-Cola, the company is able to maintain a very high level of profit margin.

Before Buffett bought into it, Coca-Cola maintained decades of growth. Now, Coca-Cola has lost its high growth, but its operational stability still continues. In this regard, we can observe several indicators from its performance.

First, stability of performance. Compared to ten years ago, Coca-Cola's revenue has declined slightly, while net income has increased slightly. During this period, except for some one-time factors, Coca-Cola's performance has fluctuated little, with ups and downs.

Second, stability of profitability. Mainly focusing on gross margin, net profit margin, and return on equity (ROE), let's look at the data from the past five years.

Looking at the gross margin, Coca-Cola's gross margin has mostly remained around 60%, showing overall stability.

In terms of net profit margin, Coca-Cola's net profit margin has mostly stayed between 22% and 25%.

From the perspective of return on equity, starting from 2019, Coca-Cola's ROE is maintained at a high level between 40% and 50%.

Third, stability of operational capability. The main indicators to observe are accounts receivable turnover and inventory turnover.

From the perspective of accounts receivable turnover, coca-cola's indicator has shown a slight increase over the past five years, reaching around 13.3 times in 2023.

Looking at the inventory turnover rate, coca-cola has maintained around 4-5 times over the past 5 years, remaining in a stable state.

Overall, coca-cola's operation in the recent four to five years has maintained a relatively stable condition, whether it is performance growth, profitability, or operational capability, the performance in terms of results has been quite steady. Therefore, for future performance, we may not expect coca-cola to have a significant breakthrough in performance; observing its ability to maintain stability will suffice.

2. Brand moat

So, what is the secret behind coca-cola's steady operation for over a hundred years? Its brand moat cannot be underestimated.

Coca-cola owns a wide range of beverage brands, including Sprite, Fanta, Minute Maid, and so on, but the core is still coca-cola, the world's largest cola brand.

Coca-cola is sold in over 200 countries globally, establishing a very profound brand image in consumers' minds. Buffett once said, 'If someone gave me $100 billion to defeat coca-cola and become the new leader in the global beverage industry, I couldn't do it.' This shows that in Buffett's eyes, coca-cola's brand moat is almost impregnable.

So, how can we measure whether coca-cola's brand moat is solid? Perhaps we can refer to one indicator: advertising expenditure/revenue. The lower this indicator, the stronger its brand influence may be. This implies that with a powerful brand influence, the company may only need minimal advertising expenditure to capture consumers' hearts and wallets, thereby driving revenue growth.

We observe the advertising expenses/revenue indicator of Coca-Cola over a longer period. We can see that this indicator was around 10% nearly 20 years ago, in 2004. By 2011, Coca-Cola's revenue had doubled compared to 2004, and this indicator had decreased to around 7%.

Starting from 2014, as Coca-Cola's revenue began to decline, which may also indicate a decrease in brand influence, Coca-Cola increased advertising promotion to boost brand visibility. This indicator steadily climbed to nearly 13% in 2018. In recent years, as Coca-Cola's revenue returned to a stable growth path, this indicator has reverted to around 10%.

Looking at the data from the past 20 years, for Coca-Cola, the advertising expenses/revenue ratio around 10% may be a relatively neutral level. We can continue to monitor this indicator in its subsequent performance. If it exceeds 10% by a significant margin, it may indicate a weakening of its brand moat.

3. Dividends and Buybacks

Coca-Cola mainly operates with light assets and does not require significant capital expenditures, so what does the money earned each year do? In the US stock market, the common practice among listed companies is to use excess cash for dividends and buybacks.

Through buybacks and dividends, companies can reward shareholders, increase the company's return on equity and earnings per share, and inject additional liquidity into the market, which can be seen as a win-win.

As for Coca-Cola's buybacks and dividends, data shows that they can be considered very generous. Taking the past decade as an example, Coca-Cola's total net income is around $83.9 billion, while the total amount of dividends and net repurchases (share capital decrease portion - share capital increase portion) is as high as $86.3 billion, even surpassing net income. The total dividends amount to approximately $71.8 billion, with the annual dividend yield staying around 3%.

Although the situation where dividends and buybacks exceed net income is unlikely to persist, Coca-Cola's generous shareholder return is indeed quite rare in the entire US stock market. Its dividends and buybacks as a percentage of net income have mostly exceeded 80% during the 2013-2023 period, which may be a significant reason why its stock price rose in most years during this 11-year period.

In future financial reports, we can continue to focus on the proportion of Coca-Cola's dividends and repurchases to net income, to see if it can maintain the historical performance of rewarding shareholders.

After reading this, you may have some new insights on how to interpret Coca-Cola's performance. It is worth mentioning that every time a leading company releases its performance, it may present a rare trading opportunity for different types of investors.

For example, if an investor reads the past performance and combines it with the latest developments and feels that a company's latest performance will release some positive signals and be bullish for the short-term stock price, the investor may consider buying the underlying stock or buying call options.

On the other hand, if an investor believes that a company's latest performance will not be optimistic and will put pressure on the short-term stock price, the investor may consider short selling through margin trading or buying put options.

Of course, if an investor finds that the direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance announcement, the investor may consider leveraging the volatility of its stock price and implement a straddle strategy by buying both call and put options to seize potential opportunities.

In conclusion,

Coca-Cola's past operational performance has been very stable. We can continue to monitor the company's performance fluctuations, profitability, and operational capabilities to observe if it can continue its steady operations.

The brand moat of Coca-Cola is the key to its past steady performance. By observing the indicator of advertising expenditure / revenue, we can measure the stability of its brand influence.

Coca-Cola has been very generous in dividends and returns over the past decade, and we can continue to monitor the company's willingness to generously reward shareholders in the future.

Each time the company releases its performance, it may bring potential trading opportunities. Investors can consider suitable trading instruments based on their individual risk tolerance.

Risk and disclaimer notice: The above content does not constitute any financial marketing or investment invitation, nor does it constitute any investment advice. Before making any investment decisions, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors when necessary.