Coca Cola (KO) Dividend Stock Analysis

Summary

Coca Cola, one of the most well-known companies in the world, is trading at a reasonable value compared to its historical standards.
-Revenue Growth: 8.7%
-Earnings Growth: 11%
-Cash flow Growth: 11%
-Dividend: Entering 2010, Coca Cola’s dividend is $1.76 annually and currently yields 3.26% with nearly 10% 3-year dividend growth.
In summary, I think Coca Cola is a good value as long as it remains under or dips below $58.

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Overview

The Coca Cola Company (KO), with one of the strongest brands in the world, is the largest non-alcoholic beverage company around. Established in 1886, Coca Cola has been growing sales for over a century now and has a presence in over 200 countries. The company is a dividend aristocrat, as it has increased dividends for 48 consecutive years. Ironically, while Coke has grown considerably in the past 15 years, it has been a fairly bad investment because it was valued so highly back in the 90s. Looking forward, it may be a good investment since it is currently trading at a reasonable valuation.

Revenue, Earnings, Cash Flow, and Margins

Coke has had great performance over the past few decades, and highlighted here is their respectable performance over the past three years.

Revenue Growth

Year Revenue
2009 $30.990 billion
2008 $31.944 billion
2007 $28.857 billion
2006 $24.088 billion

Over the past 3 years, Coca Cola has had a respectable 8.7% in annual revenue growth. Between 2006 and 2007, Coke grew revenue by 20%, and between 2007 and 2008, they grew revenue by over 10%. 2009 saw a decrease in revenue (and a decrease in advertising, according to their 2009 annual report), but they continued to grow profits and cash flow.

EarningsGrowth

Year Earnings
2009 $6.906 billion
2008 $5.807 billion
2007 $5.981 billion
2006 $5.080 billion

Coke has enjoyed nearly 11% annual earnings growth over the past three years. The most recent year, from 2008 to 2009, saw a 19% increase.

Analysts predict 11.4% EPS growth in 2010 and 9.6% EPS growth in 2011.

Cash Flow Growth

Year Cash Flow
2009 $8.186 billion
2008 $7.571 billion
2007 $7.150 billion
2006 $5.957 billion

Annually, that’s a cash flow growth rate of over 11%.

Net Profit Margin

Coca Cola currently has an impressive 22% net profit margin. Pepsico only has a 14% net profit margin, mostly because their non-beverage products like Frito-Lay chips have drastically lower margins. Hansen Natural, a smaller beverage company competing with Coke, has an 18% net profit margin. Coke runs the show here.

Dividend Growth

Coca Cola has increased their dividend for 48 consecutive years. This puts them near the top of the dividend aristocrat list. The stock currently yields 3.26%, and they’ve raised their dividend by 7.3% this year.

Dividend Growth

Year Dividend Yield
2009 $1.64 $3.28%
2008 $1.52 3.04%
2007 $1.36 2.50%
2006 $1.24 2.80%

Coke has grown stock dividends by 9.7% over the past three years. The most recent increase, from 2009 to 2010, was a 7.3% increase. The payout ratio is a moderate 56%, so the dividend is safe for a while and has room to grow.

The company has also been repurchasing shares annually. In 2009, they repurchased $1.5 billion worth of shares.

Balance Sheet

Coke has a strong balance sheet. LT Debt/Equity is only 0.20, and their current ratio is 1.3.

Investment Thesis

Coca Cola currently has what they call the “2020 Vision”. It’s an unusually specific long-term plan for growth. This is great because it shows that the company is really looking ahead and setting ten-year tangible expectations and benchmarks for their company. Most shareholder-friendly companies of course have objectives like “create shareholder value over the long run”, but this is the most specific set of goals I’ve yet seen for a ten-year period from a large company.

In summary, the 2020 Vision states that Coca Cola will double it’s global servings per day to 3 billion from 1.6 billion and will double system revenue and improve margins. If this is pulled-off as planned, along with their dividend payout and stock buybacks, it will create solid shareholder returns over a 10 year period.

Coca Cola is currently selling at a slight premium, seeing as how it’s a super-brand with a large economic advantage in 200 countries, but it is selling at a value compared to how it was priced for the previous 15 years or more. Part of the reason has to do with Coca Cola purchasing part of its North American bottler’s operations to try to fix the down spiral of soda in the US, and the other part has to do with the fact that investors realized that paying 50x earnings is just silly. Regardless, it looks like a reasonable value at the moment, which is unusual for Coke.

The company has been seeking healthier brands. They’re currently in the process of applying to purchase Russian juice-maker Nidan. They also own brands like “Simply Orange” that contain fruit juices that are not from concentrate. The Coca Cola Company offers a lot more than just Coca Cola.

Risks

There are some considerable risks with the company, despite the predictability of its business. Coke spent over $4 million last quarter lobbying against taxation on sugary drinks, and Pepsi is taking the high road against Coke by pulling soda out of high schools while Coke is leaving soda in there (but agreeing to pull out of primary schools). Most prominently, their flagship brand, Coca Cola, is becoming outdated. People in North America are drinking fewer carbonated beverages, and opting instead for energy drinks, tea, juices, or just water. The company has finally realized this trend, sadly behind Pepsi, but in time to start fixing their situation. They’re investing in healthier brands, but there is considerable risk that Coke’s top brands may falter over the years. They have to rely on international sales and new healthy beverages in order to grow. There isn’t much room for disappointment when the P/E is over 18.

Conclusion and Valuation

In conclusion, I think Coca Cola is a fairly good dividend growth investment right now. They’ve got the highest profit margins in the industry, a strong brand, extreme international exposure, diversified brands, and solid growth. The P/E is only a little over 18, which is somewhat of a premium, but not bad for this caliber of company.

The company has had solid revenue, earnings, and cash flow growth. The stock offers an above average dividend yield, and has been diligently increasing dividends over the past 48 years. This is the type of company that just works, period. You don’t need billions of dollars in reinvested research and development to sell more Coke, and the products don’t get replaced overnight.

I wouldn’t expect remarkable returns, but I believe Coca Cola can provide at least 10% annual returns over the next ten years, maybe more, and has a safe downside. More importantly, Coke is among the surest of dividend increasers. I wouldn’t pay more than $58 for the stock in 2010, since it’s already at a bit of a premium.

Full Disclosure: Long KO
You can see my full list of individual holdings here.

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Comments

  1. A good place to start learning about Forex Robot and how it’s Works

  2. Coke is the next on my list as part of my dividend core, along with JNJ, PG, EMR and BP.

    I knew nothing about how p/e ratio relates to price stock until recently. It was not until I started researching the p/e for Coke in 2000 that the static price during the last decade started to make sense. I didn’t realize the p/e had risen to the mid 40s.

    It will be interesting to see if Coke – and JNJ and other stocks that have remained static – will start to gain in share price when the next secular bull begins at some point later in this decade. I agree that Coke is more than worth buying for the dividend alone. But I think we might also see some sharp gains in share price a few years from now.

  3. Thanks for your thoughts, Tim. Coke is definitely worth, in my opinion, of being a core dividend holding.

    I notice that a lot of people don’t pay a lot of attention to the valuation of stocks, but as people learn more, they begin to see that a great company doesn’t necessarily make a great stock, as was the case for Coke for the last 15 years or so. Coke is still at a slight premium in terms of price, so I wouldn’t expect huge price appreciation, but I expect that their international growth will continue and there should be some pretty good overall returns for long-term investors in the form of both dividends and moderate appreciation. JNJ on the other hand is at a lower valuation and I expect pretty significant long-term price-appreciation.

  4. Thanks for the insights.

    Was there a choice for you between Coke and Pepsi? I decided to go with Coke because of the international recognition of the brand name and the higher dividend. Yet Pepsi has successfully diversified into snack foods and the share price has performed better. It’s a difficult choice.

  5. I did indeed spend some time considering both Coke and Pepsi, and found them both to be reasonably attractive investments. I don’t rule out investing in Pepsico in the future, but for now I found Coke to be more compelling.

    For one thing, because Coke sticks to beverages, they have a higher net profit margin (22% compared to Pepsi’s 14%). Snack foods drastically reduce margins and are more affected by commodity costs. I’m already invested in Smuckers so I have my share of healthy food options in my portfolio and wanted Coke’s pure beverage approach. Coke also has a stronger presence in other countries than Pepsi, even though both are truly international companies. Coke has very specific long-term goals in mind according to their 2020 Vision.

    The one thing I like about Pepsi, though, is their management. Pepsi realized long before Coke that they need healthier products, and now Coke is playing catch-up. Historical performance is one thing, but the future is what counts and now that Coke is focusing more on health I expect good things.

    As for share price performance, I try my best to ignore that metric. Popularity contests don’t impress me. If anything, recent excitement about a stock turns me away from it, because by the time something is popular, it’s likely too late to get involved. I’m primarily concerned with company fundamentals and a reasonable valuation of the current stock price.

    One thing to keep in mind is that estimates of future share appreciation are unhelpful at best. For example, a few months ago I expected my holding of EMR to be flat for a while because it was richly valued, but now it’s had another run-up in price and is even more highly valued, so it’s difficult or impossible to predict what people will do and what they will buy in the short term.

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  7. this post is very usefull thx!

  8. good really nice coke has had great performance over the past few decades, and highlighted here is their respectable performance over the past three years.

  9. Thanks for the solid risk assessment. The taxation of unhealthy foods is eventually going to become more mainstream and many brand like Coke will take a hit. For the time being they are fairly safe though.

  10. I’ll follow up here regarding Coke. I learned a lot from the articles here. and went on to do some more homework and studied the KO site. I decided to go ahead and buy Coke when the market plunge sent it down towards $50 per share last Spring. Since then I have added to my holdings and I’m very glad I did.

    Thanks for the info.

  11. Sounds like a great investment decision Tim- buying KO at a discount.

    Coca Cola is at the top of my list for publishing another analysis on, seeing as how it’s been more than 14 months since this one. I may be publishing one this upcoming week or next week.

  12. I believe what you said was very reasonable.
    But, what about this? suppose you added a little content?
    I ain’t saying your information is not good., but suppose you added a post title that grabbed people’s attention?
    I mean Coca Cola (KO) Dividend Stock Analysis is a little vanilla.
    You ought to peek at Yahoo’s front page and note how they create news headlines to grab viewers interested. You might add a related video or a picture or two to get readers interested about everything’ve written.
    Just my opinion, it would make your blog a little livelier.

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  5. […] As Dividend Monk nicely put it, this “company has had solid revenue, earnings, and cash flow growth. The stock offers an above average dividend yield, and has been diligently increasing dividends over the past 48 49 years. This is the type of company that just works, period.”  Like Derek Foster recently told me, nobody is going to replace this company anytime soon.   Based on another year of refreshing dividend news, I couldn’t agree more Derek. […]

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