Friday, September 13, 2013

Stock Analysis of 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 51 consecutive years. Warren Buffett’s Berkshire Hathaway (BRK.B) is the largest shareholder of the world’s largest beverage company.

The company’s last dividend increase was in February 2013 when the Board of Directors approved an 9.80% increase to 28 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 8.60% to its shareholders.


The company has managed to deliver a 9.20% annual increase in EPS since 2003. Analysts expect Coca-Cola to earn $2.11 per share in 2013 and $2.28 per share in 2014. In comparison Coca-Cola earned $1.97 /share in 2012.

The company’s return on equity has been on the decline over the past decade, falling from a high of 33.60 % in 2003 to a low of 27.40% 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 9.80% 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 1973 we see that Coca-Cola has managed to double its dividend almost every six 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 close to fully valued at 19 times forward 2013 earnings, has a sustainable dividend payout and yields 2.80%. In comparison, PepsiCo (PEP) is trading at a P/E of 19.90 and yields 2.70%. For enterprising income investors, selling a January 2015 put on Coca-Cola with a strike of $40, could result in an entry P/E of about 16, if exercised. If Coca-Cola stock trades above $40 at expiration date, the investor would get to keep the whole premium of approximately $4/contract. Otherwise, just wait and look for a correction below $40.

Full Disclosure: Long KO, PEP and DPS

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