Capital gains tax to rise? – 3 share ideas for the long term

Despite being a well-known brand, Coca-Cola is often a very misunderstood company. Besides its namesake, Coca-Cola owns a host of drink brands, including Fanta, Sprite, innocent smoothies, smartwater, and many more.

However, what separates the company from most of its peers is its operating model.

Coca-Cola doesn’t actually bottle the drinks itself. This would mean owning a host of bottling plants worldwide, each of which would need to be filled with expensive machinery requiring fairly regular upgrades or replacements.

Instead, Coca-Cola offloads this task to local bottling plants already established in the required region. This allows the group to keep a lid on costs and supports its industry-leading gross margins, which hover around the 60% mark.

The interests of both parties are aligned by the group owning minority stakes in these bottling plants, typically between 20-25%. So, when the bottlers do well, so does Coca-Cola.

This structure has two major benefits.

Firstly, it frees up more cash for Coca-Cola to outspend its peers on marketing, which in turn helps power top-line growth for the bottlers.

Over the last decade, the group spent around $94bn on marketing. That’s more than double its main rival, PepsiCo, which also has to split its advertising budget between both food and drink.

Secondly, as bottlers don’t need to invest in marketing, they can invest more resources into upgrading machinery and digitising sales teams to help support best-in-class execution.

The split-role structure makes it very difficult for competitors to challenge Coca-Cola’s dominance.

The balance sheet is in good shape and the 3.3% forward prospective dividend yield is supported by extremely healthy free cash flows. With net debt levels trending lower, we see scope for increased share buybacks moving forward.

Keep in mind that revenue growth’s unlikely to shoot the lights out. Acquisitions could be one way to pick up the pace, but they always involve risk.

Getting the right brand at the right price is a difficult task. And even if Coca-Cola pulls it off, it will likely need to invest for several years to ramp up production and elevate brand awareness among consumers.

The valuation’s sitting slightly above its long-run average. We think this highlights the strengths of the brand, and over the long term, we expect this to be more than justified through continued growth.

But investors should remember nothing is immune to ups and downs, especially in the short term.

Greggs has come a long way from the northern bakery cliché. It’s won over customers up and down the country and is now a real staple in town centres and retail parks alike.

It’s already one of the largest food-on-the-go retailers in the UK, with the number of shops set to rise from around 2,500 to 3,000 over the next few years.

Market share is already at an all-time high, but relying on high-street shoppers and general retail footfall isn’t sustainable. It’s why we’re supportive of plans to increase its presence at travel locations like train stations and airports.

Greggs has worked hard over the last few years to increase the number of franchised shops to around 20% and we think this is a good idea. Compared to company-owned sites, these locations aren’t on the hook for day-to-day costs, which is beneficial when things like energy costs are volatile.

There are other growth levers baked into Greggs’ offering too.

The group’s bolstering delivery services (it now partners with both Just Eat and Uber Eats), offering click-and-collect, and opening later to attract more evening customers.

The evening food-to-go market is huge, and an area Greggs has barely scraped the surface of. Just under half of Greggs shops now serve until 7p.m. or later. And with improved hot-food options and a loyalty programme, it’s giving customers more reason to visit them throughout the day.

Inflated costs are starting to ease and the group’s locked in near-term prices on food, packaging and energy costs. Being able to more accurately predict future costs in this environment is key – it helps keep prices in check and retain its coveted value offering.

However, the group has high exposure to energy costs, which are outside of its control, and we can’t rule out further volatility in the future.

The balance sheet is in good shape for now and perhaps unusually for a company so focused on growth, there’s also a respectable 2.3% forward prospective dividend yield on offer.

There’s a lot to like about Gregg’s proposition and we continue to be impressed by its ability to tap into growth drivers. The valuation’s slightly below the long-run average, But at 21.7 times expected earnings, it means the market’s set a high bar and is likely to remain sensitive to even slight deviations from targets. There are no guarantees.

GlaxoSmithKline (GSK) is a global biopharmaceutical company. It develops medicines for cancer patients, vaccines for a range of diseases and infections, and even asthma treatments.

Demand for essential medicines has been fairly stable as you would somewhat expect, even in difficult economic conditions. High barriers to entry like multi-billion-pound research programmes and complex regulations also help keep competition at bay. It means speciality pharmaceutical developers have tended to enjoy a wide competitive moat.

Excellence in Research & Development is key in this industry, and the group’s shingles vaccine is one of the latest stars. Despite the recent disappointment in US sales growth, this product still has room to grow as it expands to new patient populations.

Beyond vaccines, the group also has a strong presence in HIV treatments which make up around 20% of total revenue. Its newer HIV treatments are a key part of GSK’s future, as generic competitors eat away at pricing power for some of the group’s legacy treatments.

The group’s focus on HIV is now shifting to long-acting innovation therapies. It’s these that have shown promise, helping to capture additional market share and drive double-digit growth for the category in the first half.

It can also be a challenging sector though.

There’s constant pressure to deliver new therapies to offset the loss of exclusivity from more established bestsellers as patents expire. And many experimental medicines never make it to market after costing a lot of time, money and resources.

Strong cash flows and manageable debt levels underpin a forward prospective dividend yield of 3.8%. It also supports selective acquisitions, which are adding to the healthy research pipeline.

GSK’s valuation is significantly less demanding than many of its peers. Much of this is likely to stem from the ongoing litigation surrounding cancer links to its heartburn drug, Zantac.

The latest legal developments seem to be going GSK’s way. Some analysts expect settlement to be the most likely outcome, with a cost much lower than that implied by the decline in valuation. But we can’t rule out more pain and the trial outcome is likely to be the biggest driver of sentiment in the near term.

Once a line in the sand is drawn, execution of the growth strategy and strong clinical pipeline could return to the spotlight. So far so good here, but remember, the drug approval process is long and expensive, with many treatments never seeing the light of day.