This article originally appeared on The DIV-Net March 1, 2010.
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 only 3.) above. Since KO’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 18.3% premium to its calculated fair value of $44.55. 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 48 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 $903. 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 7.3% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.98%
Other: KO is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
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 would need to increase to $62.48 before KO’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.82%.
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 5.6%. This dividend growth rate is less than the 7.3% 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.
Coca-Cola is the world’s most recognizable brand. KO’s extensive direct distribution network enables the company to deliver its products to almost all corners of the globe with unmatched efficiency. With its relatively stable end markets, dominant market positions and strong financials, KO is type of stock dividend growth investors are looking for. The stock is currently trading slightly above my $44.55 fair value price, but the quality of the company is such that I would be willing to pay a small premium for. Definitely a buy on dips. 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 (2.6% of my Income Portfolio). See a list of all my income holdings here.