Coca-Cola is a renowned company in the production of beverages across the world. It has operations in over 200 countries across the world and has been in operation for over 124 years. It is estimated that the company sees aver 1.6 billion servings every single day. The mother company in the US holds the rights to the manufacture of all the concentrates, syrups, and bases which it sells to the subsidiaries located across the globe. It also engages in the manufacture of fortified food drinks with the aim of combating nutrition problems, especially among the younger generation. The company has over 920000 employees globally (Growth leadership and sustainability, 2010).
In addition to the common brands such as coke, sprite, and Fanta, the company is involved in the production of numerous other products developed locally by the subsidiaries. Consequently, over 3300 beverages are in different countries. Due to its uniqueness and excellence in management, the company has seen over 48 years of continued increased levels of dividend payout (Coca-cola. Heritage timeline, 2010).
In recent years, the company has grown its product portfolio to include diet sodas aimed at trying to eliminate the notion that its products may be unhealthy by containing too much sugar (Products, 2010).
Common stock and Preferred stock
Both Common stock and preferred stock are ways through which capital for companies can be raised. Unlike in the case of a sole proprietorship, companies are required by law to have their capital subdivided into sub-units for ease of divisibility. These units of ownership are called stocks. Purchasing a stock entails giving up a certain amount of money in order to secure a stake in the company of interest which in turn should lead to future returns. Due to the varying preference among investors, the law allows the categorization of stocks into the two categories mentioned above. The flexibility offers companies a wider channel to raise capital more easily.
Generally, holding a common stock means that the holder becomes a direct owner of the said company. Of course, the ownership interest is limited to the level or proportion of ownership as in many cases companies especially those already listed are owned by more than one person. The holders of these common stocks are regularly known as the company’s shareholders. They are much more common than preferred stocks.
Where companies are listed in the stock exchange the stocks are availed to the general public through an initial public offer. Initial public offers are conducted with the authority of regulatory agencies. In doing this, the company has several goals. The most important is to raise additional funds for investment. The second but also quite important is the publicity obtained among the customers and general public which builds on the confidence. Prior to conducting the public offer, a major valuation is conducted in order to ascertain the true worth of the business. Other factors that come to play include the macroeconomic environment within which the business operates as well as any future prospects. Upon full determination of the true value of the business, then the figure arrived at is subdivided into the stocks at a price. Usually, in initial public offers, the stocks are sold at a discount. The public can then purchase these stocks and collectively become the owner of the company.
As time moves, the share values fluctuate. The fluctuation is dependent on the management style adopted, the market changes for the products, and any other factor which could affect either positively or negatively the performance of the company. When the management attracts confidence among investors, then the price is likely to increase. However, if there is doubt surrounding their competence, then the values could drop. In the same breath, if faced with the very stiff competition or unfavorable market conditions, then the company’s stock prices are likely to dip.
As mentioned above, the value of common stocks fluctuates depending on several factors. Upward fluctuations are called capital gains on the part of the shareholders. On top of these, the stockholders are entitled to streams of income in terms of dividends. Dividends paid out are determined mainly by the management teams as they are best placed to know the future financial obligations of the company. The dividend is shared among the stockholders according to the proportion of ownership of the stocks.
On the other hand, preferred stocks are owned by preferred stockholders. The preference element comes in when it is time to share earnings as well as in cases of liquidation. The company’s earnings are first shared among the preferred before getting to the common stockholders. This means that before considering paying out dividends to the common stockholders, preferred stockholders have to get their share first. This form of investment is less common compared to the common stock. Preferred stockholding is very close to a bond. This is because it attracts a constant return whether the company is making earnings or not. The terms in the form of earnings of the preferred stock are well explained and understood by the company and the stockholder before investing just like is the case in bonds. Consequently, it becomes very clear that the investor has no interest in ownership of the company but rather the monetary gains accruing to the investment.
As mentioned above, the common stock avails both capital growth as well as dividends from the earnings of the company. However, preferred stocks do not change value despite the earnings of the company. Still, the returns to the preference stocks already agreed upon do not fluctuate. The level of earnings for the common stock is determined mainly by the performance of the company as well as the director’s strategies for the future.
In a case where the company becomes bankrupt, the common stockholders are the last to be paid. Just like is the case during the sharing of earnings, preference shareholders get their investments back before considering the common stockholders. However, despite these overriding characteristics, there are several categories of preference stocks. The first is the participating preferred stock. This stock enables shareholders to obtain adjustment to dividends in certain years when earnings exceed certain limits. The adjustable-rate preferred stock just like the name suggests has adjusted earnings. The adjustment is mainly based on the market rates of treasury bills and other such instruments. The convertible preferred stock is one with a predetermined price at which it can be converted to common stock in the future. The final type is the fixed-rate perpetual preferred stock. This is the preferred stock with no maturing period meaning that the returns agreed upon are to be earned for the life.
In terms of voting rights, only holders of common stocks are allowed to vote for directors who are in charge of the daily running of the company. It is clear that the sole aim of the preferred stockholder is the return for investment. Consequently, his/her return is guaranteed but he/she losses voting rights due to the drastically reduced risk. The common shareholder shoulders the highest risk and thus is given the opportunity to choose who is to manage the risk for him/her.
Ordinarily, the voting rights are proportionate to the number of stocks held. Each stock entitles the common stockholder to one vote. Consequently, the more shares a person has, the greater is voting right and hence ability to influence the outcome of the vote. Again this is in consideration of the fact that they shoulder bigger risks in case of bankruptcy.
Common stock vs. preferred stock ratio
Comparison between the common and preferred stocks is important in the evaluation of the company’s financial risk. This is because preferred stocks require special treatment which increases the financial commitment of the company. The common stock and preferred stock ratio show how the common stock and the preferred stock in a company compare. It demonstrates a clear picture of which stock in the company’s capital structure, has a higher stake. This is helpful especially among financiers in establishing the creditworthiness of a company (Financial statements, 2010). In cases where the preferred stock is high then the company faces more commitment than where there is less. Obtaining the ratio entails dividing the total of common stocks by the total of preferred stocks (Coca-cola, 2010). For coca-cola, the ratio is as below.
Common stock/preferred stock=880,000,000/396,000,000 =.consequently, the ratio of common stock by preferred stock is 2:1
Rights of common and preferred stockholders
Common stockholders have the right to vote in the directors, unlike the preferred stockholders. This means they have greater control over the affairs of the company than the preferred stockholders. The right to vote for directors enables the common stockholders to manage their exposure to risk. Traditionally, the common stock holders are entitled to receive dividends which have been declared by the directors and approved by the shareholders. They also have a right to access financial information as regards the company. This is important for them as investors. In many cases, they are also entitled to buy any new shares before the rest of the public is considered.
Unlike common stockholders, preferred stockholders have a right to some predetermined returns. The preferred stock holders also have a right to claim their investment before the common stockholders in case of bankruptcy. The rights of the preferred stockholders are mainly limited to the bigger rights over the company’s assets in comparison to the common stockholders. However, they are also entitled to the financial reports of the company’s they invest in.
In conclusion, it is important that an investor understands the implication of holding common stocks as opposed to preferred stock and vice versa. This is because they need to tie their investment needs and the responsibilities accruing from their investments. For an investor merely interested in purely making some returns with minimal risks and added responsibilities, the preferred stocks are the best option. However, for companies performing well the returns maybe significantly less than those obtained through common stocks. For high risk investors interested in high incomes, the common stock is best.
Coca cola co balance sheet. Dailyfinance. 2010. Web.
Coca-cola. Heritage timeline. 2010. Web.
Financial statements. Cocacola Company. 2010. Web.
Growth leadership and sustainability. 2010. Web.
Products, 2010. Coca-Cola company. Web.