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After the latest reshuffle, Coca-Cola Europacific Partners (LSE:CCEP) is the latest addition to the FTSE 100. And it has a lot of the hallmarks of a quality passive income investment.
The company distributes US giant Coca-Cola‘s products in the UK, Europe, and Australia. While the dividend yield is only 2.5%, I think there’s a lot to like about the business.
Invaluable assets
On the face of it, the process of manufacturing and distributing soft drinks isn’t particularly attractive. It involves a lot of machinery and equipment and this costs money.
That means inflation can be a significant issue. As costs rise, companies that have a lot of machinery to maintain could find themselves with increased pressure on margins.
Fortunately, Coca-Cola Europacific Partners doesn’t just make any old soft drinks. It makes Coca-Cola products and it benefits from rights to some of the most iconic brands in the world.
These days, the Coca-Cola range extends well beyond carbonated beverages. It includes Costa coffee, Innocent smoothies, and Powerade energy drinks.
The right to distribute these products specifically puts Coca-Cola Europacific Partners well ahead of other manufacturers. But it doesn’t have any of the associated marketing costs.
All it has to do is buy concentrates from the Coca-Cola company, turn them into drinks, and sell them. And despite being capital-intensive, it earns a decent return on the cash it invests.
Dividends
The current dividend yield is only around 2.5%. But I think there’s reason to believe this can grow quite substantially in the future.
Over the last five years, the company has distributed just over 30% of its net income to shareholders. The vast majority has been retained within the business.
This means a couple of things. Most obviously, it means there’s scope for the firm to increase its dividend by distributing more of the cash it generates.
To my mind though, there’s a more important benefit. As long as the business earns good returns on invested capital, the cash it retains should help earnings grow.
That means the company should be able to increase its dividends simply by making more money. And the longer this can go on, the better it will be for investors.
No business can grow forever. But the Coca-Cola brands have proven to be a durable asset and investors shouldn’t underestimate the opportunities this gives Coca-Cola Europacific Partners.
Coca-Cola ecosystem
It’s easy to think of stocks like this as inferior alternatives to the Coca-Cola company. After all, they were historically spun out from the US firm.
I think however, it’s important to treat these businesses on their own merits. And the newest addition to the FTSE 100 isn’t one to be underestimated.
It’s a business with extremely valuable intangible assets that earns strong returns on invested capital. And this has resulted in some impressive dividend growth in recent years.
All of this adds up to a company that investors should take a close look at. I think it has a lot of the hallmarks of a stock that can provide passive income for a long time.
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