This article originally appeared on The DIV-Net August 17, 2009.
Linked here is a detailed quantitative analysis of The Coca-Cola Company (KO). Below are some highlights from the above linked analysis:
Company Description: The Coca-Cola Company is the world’s largest soft drink company. It engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates, fruit juices and syrups worldwide.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
KO is trading at a discount to 1.) and 3.) above. The stock is trading at a 17.3% premium to its calculated fair value of $41.33. KO did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
KO earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. KO earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 47 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
KO earned a Star in this section for its NPV MMA Diff. of the $1,162. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 7.9% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. KO earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.
Other: KO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. KO enjoys a dominant market share around the world. Margins and volumes in KO’s non-carb portfolio should continue to grow as the company expands distribution and is able to hold pricing. KO’s high exposure to international markets should offset small U.S. declines of the Coke unit. Coca-Cola Zero should drive trademark Coca-Cola volumes worldwide. A weakening dollar would provide an additional boost in profits. Risks would include slower than planned growth and adverse foreign currency exchange rates.
Conclusion: KO did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks KO as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $62.66 before KO’s NPV MMA Differential fell to the $500 that I like to see for a stock with 47 consecutive years of dividend increases. At that price the stock would yield 2.62%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.4%. This dividend growth rate is lower than the the 7.9% used in this analysis, thus providing a margin of safety. KO has a risk rating of 1.50 which classifies it as a low risk stock.
KO is a great company that can produce a long resume detailing its many successes. Unfortunately, I am not the only person that has figured this out. It is not uncommon for KO to trade at a premium to its buy price. Another concern is KO’s Free Cash Flow Payout, currently at 64%, tends to be higher than the 60% level that I prefer. However, this is mitigated to an extent by relatively low debt levels and predictable cash flows. KO is a stock I will buy when it dips below its buy price of $41.33. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in KO (3.5% of my Income Portfolio).
What are your thoughts on KO?