Pension Plans of Coca Cola Co. Vs.

¶ … Pension Plans of Coca Cola Co. Vs. Pepsi Inc.

Compare the pension plans of Coca Cola and Pepsi, noting what type of pension, and funded status as of 2007 end of year.

A) Coca Cola Co.

This is a Defined Contribution Plan.

For its primary plan the employer matches 100% of participants contribution, up to 3% of compensation.

Benefit obligation at end of year for 2007 was $3,517 million.

Benefits paid for pensions plan were $41 million, in payments related to unfunded pension plan paid from Coca Cola Co. assets.

Defined Contribution Plan is composed of:

Employer contribution-is determined by plan

Risk is borne by the employees

Benefits are based on plan value

B) Pepsi Inc.

This is a Defined Benefit Plan.

It is determined by the interest rate that is used to determine the present value of liabilities, and is the discount rate

For 2007, the Expense Discount Rate was 5.7%

Expected return on plan assets was 7.7%

The pension plan contribution was $230 million, with $92 million as discretionary for the 2007 fiscal year.

Generally, Pepsi Inc. does not fund their pension plans when their contributions would not be currently deductable.

Defined Benefit Pension Plan is composed of:

Benefit determined by plan

Employer contribution varies

(determined by Actuaries)

Risk is borne by the employer

2) Calculate Relevant rates that were used by Coca Cola and Pepsico in computing their pension amounts.

For CocaCola, the ratesof equity securities at 58%, debt securities at 29%, and real estate & other securites at 13% (adding to 100%, total), were the relevant rates to calculate the Defined Contribution Plan used.

For Pepsico, the discount rate of 5.7% for expenses, and the expected return rate on assets was 7,7%, and expected rate of salary increases at 4.5%. These are the most relevant rates for the Defined Benefit Plan.

3) Determine which company you would invest in if you were a potential stockholder. Justify your answer.

Pepsico is the better investment currently, as it leads by steady gains over Coca Cola in the stock price per share, and very important to consider: foreign market is really giving Pepsi the competitive edge, and the new green conscious life style of American market base is trending towards bottled waters, and the sugar-based beverages have lost a significant customer for this reason,

Stock prices as of 2008 show Pepsico to be the leader at $68.00 per share (a nice rise over 5 yrs from $45.00 per share in 2003); Coca Cola's price per share is $59.33 in 2008 (although this is still a good rise from $45.00 per share in 2003). Note that the two companies were the same per share in 2003, at $45.00.

The most important accounting ratio to consider when investing in stock is the ratio of net income to common equity. The stock holders invest to get a return on their money, and this ratio reveals how well they are doing. Return on Equity (ROE) for Pepsico is 34.0%, whereas Coca Cola has a ROE of 27%, over a five-year period, from 2003 -2008. The industry overall is 30.7% and S & P. 500 is 21.0%, over this 5 yr period. (Harkonnen, 2009)

In their 'beverage battle' for top competitor the two companies have shifted their emphasis in their concerns over the 100 years they have been in the market.

Pepsico has shifted from solely a beverage bottling company to now a primarily snack-chips distributor of Frito -- Lay, etc.: only 20% of Pepsico is beverages now, with 80% of the product being the thriving snack industry. Another major shift is the addition of foreign trade for both Repsico and Coca Cola, with Pepsi now being the most popular drink in Thailand, and Coca Cola showing gains with India for its famous beverage.

With modern green living and health concerns, the bottled water industry has taken a huge cu7stomer bas from these gisants whoi once held the dominant positions in the beverage industry.

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Another consideration is the clientele with diabetic concerns shifting to sugar-free and bottled water. The products Aqua Fina and Dasani are the answer respectively from Pepsico and Coca Cola.

As an investor, I would choose Pepsico, for its diverse products in a thriving snack market, steady gains over the years.

4) Determine which company you would rather work for if you were a potential employee. Justify your answer.

In looking at the long-term investments, steady gains in stock, and very straight forward pension fund, I would choose Coca Cola as my employer over Pepsico.

The Accumulated Benefit Obligation of the Defined Contribution Plan of Coca Cola is taking into account both the benefits of vested (long-term employees contributions) and the nonvested (present, new employyes) at future salaries. This no longer exists with Pepsico, because as of 2007, the company decided to close its plan to new hires, and froze it for existing participants, with few exceptions. As of 2001, Pepsico froze its Defined Benefit Plan. (Burr, 2010)

This is not good news for an employee, regardless of how successful the corporation is that they work for.