Actions of Consolidated Coca-Cola (NASDAQ:COCA) — the largest bottler of food products The Coca-Cola Company as well as a bottler of other beverages – soared to more than $1,000 this morning after the company released its financial results for the first quarter of 2024 and announced a massive stock buyback plan. As of 10:20 a.m. ET Monday, Coca-Cola Consolidated stock was up nearly 16%.
A massive share buyback plan
When it comes to growth, Coca-Cola Consolidated doesn’t really have any. Its volume in the first quarter was down less than 1% year-on-year. And with slightly higher prices, its net sales increased by 1%.
Regarding profitability, the company improved in the first quarter. It is operating margin was 13.1% in the year-ago period, but it improved to 13.5% in the first quarter. That’s good, but it doesn’t merit a massive 16% jump for the stock.
The real surprise today was Coca-Cola Consolidated’s announcement of a proposed redemption up to $3.1 billion of its stock. For comparison, the company had a market capitalization of $8 billion before the announcement. His buyout plan therefore represented almost 40% of the company, which is unheard of.
Buying back that many shares would significantly increase earnings per share (EPS). And that’s why the stock has risen even though the growth is quite modest.
Should the company take this step?
Coca-Cola Consolidated doesn’t have $3.1 billion, but management says now is the time to take on debt to reward shareholders.
In 2023, the company realized more cash than debt for the first time in 40 years – a point that management was careful to emphasize. Many companies, including Apple, increased shareholder value by taking on debt. But for Coca-Cola Consolidated, it appears taking on debt is a departure from what management has prioritized in recent years.
That said, given its size, the company may struggle to find avenues for growth, as evidenced by the quarter’s results. Therefore, it will also be difficult to grow its EPS, and EPS growth often determines stock performance. With this in mind, reducing the number of shares might be the company’s best option for increasing its EPS at this point, so this move is understandable.
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