Bond Project: Coca-Cola Vs. Us Treasury Bond

The soda drink and bottled water industry in the US includes about 3,000 companies that manufacture and distribute beverages, with combined annual US revenue of $70 billion. Coca-Cola and PepsiCo hold more than 50 percent of the market, following strong consolidation in the past decade. The Coca-Cola Company is a leader in the beverage industry and it owns four of the top five soft-drink brands (Coca-Cola, Diet Coke, Fanta, and Sprite). Its other brands include Barq's, Minute Maid, POWERade, and Dasani water. In North America, it sells Groupe Danone's Evian. Coca-Cola sells Crush, Dr. Pepper, and Schweppes outside Australia, Europe, and North America. The firm makes or licenses more than 400 drink products in more than 200 nations. Although it does no bottling itself, Coke owns 35% of Coca-Cola Enterprises (the #1 Coke bottler in the world); 32% of Mexico's bottler Coca-Cola FEMSA; and 23% of the large European bottler Coca-Cola Hellenic Bottling.

Financial Highlights 2007 2006

Net Operating revenues (million $) 28,857 24,088

Net Income (million $) 5,981 5,080

Shares Outstanding 2,313 2,348

Cash Dividend ($) 1.36 1.24

Stock Price History

Beta 0.87

52-Week Change 19.68%

S&P500 52-Week Change -9.52%

52-Week High (18-Dec-07) 27.09

52-Week Low (29-Mar-07) 19.97

Demand for non-alcoholic beverages is driven by consumer tastes and demographics. The profitability of individual companies depends on effective marketing. Large manufacturers have economies of scale in production and distribution, with average annual revenue per production

worker close to $1 million. Small companies can compete by producing new products, catering to local tastes, or selling at lower prices. From 2007 to 2012, beverage industry growth is expected to be about 12%.

We decided to track a Coca-Cola bond with a maturity on November 15, 2026. It is a grade A corporate bond with a coupon of 6.950%. From the data we collected since February 19th, the bond price and YTM for the Coca-Cola bond have remained almost consistent. The bond sells at $111.73 and has a YTM of 5.923%. We compared this bond to a U.S. Treasury Bond (AAA rating) of the same maturity. The T-bond has a lot more volatility than the Coca-Cola bond. This bond’s price has fluctuated between $122 to almost $130, with a YTM varying from 4.1% to 4.7%.

Given the data above, it is obvious that Coca-Cola is currently outperforming the market, so it is unlikely that investors are worried about the safety of Coca-Cola’s bond. However, the YTM spread between the Coca-Cola bond and the T-bond is increasing with every day. Why?

Coca-Cola Treasury

Date Price YTM Price YTM Spread

19-Feb 111.73 5.923 124.086 4.58 1.343

22-Feb 111.73 5.923 125.026 4.506 1.417

25-Feb 111.73 5.923 123.702 4.597 1.326

26-Feb 111.73 5.923 123.827 4.588 1.335

27-Feb 115.93 5.585 124.176 4.564 1.021

28-Feb 115.93 5.585 126.425 4.41 1.175

29-Feb 111.73 5.923 128.153 4.294 1.629

3-Mar 111.73 5.923 126.768 4.387 1.536

4-Mar 111.73 5.923 126.967 4.373 1.55

5-Mar 115.99 5.621 124.553 4.537 1.084

6-Mar 111.73 5.923 125.592 4.466 1.457

7-Mar 111.73 5.923 125.612 4.464 1.459