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