Earlier this month, after a spate of poor earnings updates from big ASX listed blue-chip companies, I threw my hands in the air in frustration and moaned that 'Big dividend shares are Dead'.
But I'm not ready to give up! This week I've been digging into bottler and distributor Coca-Cola Amatil Ltd (ASX: CCL).
The company has delivered patchy earnings performance over the last five years, but it has a fantastic production and distribution network. The problem is I view the on-going decline in brand value as a big risk for investors.
Charting the decline of a brand
If there is a competitive 'moat' to be found in Coca-Cola Amatil, I would argue it is not the 'Coca-Cola' brand.
The 'Coca-Cola' brand is tumbling in the global recognition surveys like this one from WPP and Kantar Millward Brown. While the Coca-Cola ranking has been pushed down by the rise of big tech companies, in the last two years the brand has also suffered falls in the survey's estimate of brand value.
The reason for the decline runs deeper than just changing health trends – it is a reflection of the structural change in the traditional advertising industry on which the Coca-Cola brand was built.
T.V. advertising was once the mark of a superior product. Today, online advertising has opened the door to new agile competitors targeting segmented niche customers; slowly diluting Coca-Cola's dominance and ability to charge price premium.
The loss of supply to Domino's Pizza Enterprises Ltd. (ASX: DMP) could be seen as a symptom of the inability to command price premiums.
Businesses need competitive advantages to command above average returns on invested capital and protect these returns over the long term. Over the last five years Coca Cola Amatil's return on capital has declined from 24% to 19.6%, but has lifted marginally in the last two years.
I would be reluctant to assign any valuation premium to the Coca-Cola Amatil business on the basis of 'brand value' today.
Instead, one appealing aspect of Coca-Cola Amatil is its strong cash position. The company had just over $1 billion of cash at 30 June 2017 after throwing $250 million into a share buy-back and continues to produce strong cash flows.
However at the current share price of around $8 per share it's not enough for me to add Coca-Cola Amatil to my 'buy' list today.
