Friday, March 11, 2011

Coca-Cola (KO) Dividend Stock Analysis

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is a member of the dividend aristocrat index and has increased distributions for 49 years in a row. The most recent dividend increase was in February, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Coca-Cola include PepsiCo (PEP), Nestle (NSRGY), Unilever (UL) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend stock has delivered an annualized total return of 3.30% to its loyal shareholders. One of the largest shareholders in the company is Warren Buffett’s Berkshire Hathaway (BRK.B).

The company has managed to deliver an impressive increase in EPS of 9% per year since 2001. Analysts expect Coca Cola to earn $3.88 per share in 2011 and $4.27 per share in 2012. This would be a nice increase from the $3.49/share the company earned in 2010. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time, as well as increases in volumes in emerging markets such as China. Coca-Cola is targeting 3%-4% growth in annual revenue and 6%-8% growth in annual operating income.

The acquisition of Vitaminwater in 2007 has increased growth in the company’s non-soda business, which is where Coke lags behind PepsiCo (PEP). The acquisition of CCE’s North American bottling business, should bring in sufficient cost savings for the company’s North American supply chain, which would result in increase in cash flows. The deal is expected to deliver approximately $350 million dollars in cost savings over the first four years of implementation. In addition to that, it will bring more control over North American operations, deliver more flexibility in the company’s strategy implementation and reduce conflicts over the product mix with bottlers.

The company’s high return on equity has been on the rise since hitting a bottom at 27.50% in 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 10.40% per year since 2001, which is higher than the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1967, we see that Coca Cola has actually managed to double its dividend every seven years on average.

Over the past decade the dividend payout ratio has remained at or above 50% for a majority of the time. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Coca Cola is trading at 18.40 times earnings, yields 2.90% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long KO, PEP and NSRGY

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  1. Nice analysis Matt!

    If you were to twist my arm behind my back and make me put every egg I own into a single stock, this would be the one.

  2. Great analysis as always. A true bread and butter stock, if there ever was one. I am long KO and only wish I had purchased more last summer! I really like both KO and PEP right now. By the way, where does the 18.40 times earnings figure come from for KO? EPS is at $5.05 and currently trading at $64.81. That's a 12.84 P/E. Thanks for the excellent site!!!!

  3. Im currently invested in ADP and JNJ pretty heavily, would you suggest adding this to the portfolio going forward? How do you feel about the two stocks I listed above? JNJ has been a back and forth like the rest of the market, but ADP has steadily risen over the past year.

  4. The thing is that a large portion of the EPS for 2010 you are seeing is coming from a gain related to the purchase of CCE North American Operations.

    From the company's press release:

    "Fourth quarter reported EPS was $2.46, with comparable EPS at $0.72, up 9%, including a $0.02 dilutive impact to comparable EPS as a result of the Coca-Cola Enterprises ( transaction. Full-year reported EPS was $5.06, with comparable EPS at $3.49, up 14%. "

    So to summarize, I used EPS of 3.83, rather than 5,06 since the extra 1.20 dollars or so came from basically writing up the company's previous initial partial investment in the bottling plans when it acquired them in full. These are one time earnings events, so they should not be taken into consideration.

    Here's more from the press release:

    "As required by accounting standards, the Company revalued its 33% ownership of CCE to fair value at the closing date of the transaction to acquire CCE's North American operations, resulting in a $5.0 billion one-time non-cash gain in the fourth quarter of 2010."

  5. Thank you DGI for the response. Makes total sense, and I can't believe I didn't see that and crunch the numbers myself. Excellent valuation. Thanks again. Even with the one time earnings event bolstering EPS, it's still a fantastic investment as always. It's just not undervalued, like it looks on paper. I'd pay a fair value for KO any day of the week, however. Thanks!


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