Friday, March 2, 2012

Stock Analysis: Coca Cola

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. This dividend king has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every for 50 consecutive years. Warren Buffett’s Berkshire Hathaway is the largest shareholder of the world’s largest beverage company.

The company’s last dividend increase was in April 2011 when the Board of Directors approved an 8.50% increase to 51 cents/share. Coca-Cola’s largest competitors include PepsiCo (PEP), Dr. Pepper Snapple (DPS) and Monster Beverage (MNST). Over the past decade this dividend growth stock has delivered an annualized total return of 6.70% to its shareholders.
The company has managed to deliver a 9.70% annual increase in EPS since 2002. Analysts expect Coca-Cola to earn $4.08 per share in 2012 and $4.47 per share in 2013. In comparison Coca-Cola earned $3.69 /share in 2011. The company has managed to consistently repurchase 0.90% of its outstanding shares on average in each year over the past decade. The spike in 2010 EPS was caused by a onetime accounting event related to recognizing a gain on the 33% stake in Coca-Cola Enterprises that Coke already owned before acquiring the bottling giant.
The company’s return on equity has been on the decline over the past decade, falling from a high of 35 % in 2002 to a low of 27.60% in 2011. 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 10.10% per year over the past decade, which is slightly higher than to the growth in EPS.
A 10% growth in distributions translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1971 we see that Coca-Cola has managed to double its dividend almost every seven and a half years on average.

The dividend payout ratio has remained at or above 50% over the past decade, ignoring last year’s spike caused by the onetime accounting gain referenced above. 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 attractively valued at 18.70 times earnings, has a sustainable dividend payout and yields 2.90%. I find PepsiCo (PEP) a better value at the moment, as it is trading at a P/E of 15.70 and yields 3.30%.

Full Disclosure: Long KO and PEP

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