(281)-719-8904 KenFaulkenberry@AAAMP.com

Coca-Cola (KO) Stock Analysis

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Coca-Cola Dividend

(updated 9/15/2017)

The Coca-Cola dividend has been paid continuously since 1920 and increased for 54 consecutive years; qualifying the company as a Dividend King, Dividend Aristocrat, and Dividend Champion.

Price: $46.24
Current Dividend: $1.48

Dividend Yield: 3.2%
Cash Dividend Payout Ratio: 73%

Market Capitalization: 197 B
Enterprise Value:  219 B

Coca-Cola Logo

Description

Sector: Consumer Defensive
Industry: Beverages – Soft Drinks

Coca-Cola (KO) manufactures, distributes and markets non-alcoholic beverage concentrates and syrups. Coca-Cola’s 30% global market share in beverages includes brands such as Coca-Cola, Coca-Cola Zero, Dasani, Diet Coke, Fanta, Vitaminwater, Minute Maid, Odwalla, Powerade, Sprite, and Simply Orange.

                   Dividend Analyzer Checklist

                                           (updated September 2017)

Dividend Safety Score (13/33 points)

Dividend Per Share (ttm): $1.44
Dividend Payout Ratio (ttm): 73%
Dividend Per Share (10 Year Growth):  8%
Cash From Operations (CFO) Per Share (ttm): $2.06
CFO Dividend Coverage (CFO / DPS): 1.4 (0/6 points)
Free Cash Flow (FCF) Per Share (ttm): $1.56
FCF Dividend Coverage (FCF / DPS): 1.1 (1/6 points)
Net Financial Debt: $22244 M
Total Assets: $91201 M
Net Financial Debt / Total Assets: 24% (7/12 points)
Net Financial Debt to EBITDA (ttm): 462%
Total Liabilities to Assets Ratio (Qtr.): 75%
Piotroski Score (1-9) (TTM): (5/9 points)

Profitability & Growth Score (10/33 points)

Revenue (10 Year Growth) *CAGR > 4.14%:   5.7%  (4/4 points)
EPS Basic Cont. Operations (10 Year Growth) CAGR > 4.14%: 3.4% (0/4 points)
Cash From Operations (10 Year Growth) CAGR > 4.14%: 4.0% (0/6 points)
Operating Earnings Yield (ttm): 3.9% (0/7 points)
Net Income (ttm): $6226 M
Gross Profit (ttm): $24790 M
Total Assets: $91201 M
Gross Profitability Ratio = GP / Total Assets: 27% (6/12 points)
Cash Return On Invested Capital (CROIC)(tttm): 9%
Return on Invested Capital (ROIC): 9%
Return on Invested Capital (ROIC) (5 Year Median): 11%
Return on Invested Capital (ROIC) (10 Year Median): 14%

Valuation Score (7/34 points)

Free Cash Flow Yield (ttm): 3.2% (4/9 points)
EV to EBIT (ttm):  31.2 (0/9 points)
EV to EBITDA (ttm): 25.6 (0/9 points)
PE10: 26.9 (3/7 points)
Price to Sales Ratio (ttm): 4.9
Price to Book Value (ttm): 8.5
Price to Earnings Ratio (P/E) (ttm):  32.3

TOTAL POINTS – (30/100) (50 is an average score)

*Compound Annual Growth Rate (CAGR)
**A Compound Annual Growth Rate of 4.14% = a 50% gain over 10 years.

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SWOT Analysis

Strengths

Coca-Cola’s most valuable strength is its brand. The Coca-Cola brand is known and well-respected throughout much of the world. Their products can be found in over 200 countries; largely because of their unmatched direct-to-store delivery distribution network.

Customer loyalty is high. With only one major competitor (Pepsi) KO has many advantages including tremendous economies of scale. Their brand, manufacturing and distribution systems, and established relationships with retailers worldwide provide significant barriers to entry for any potential new competitors.

Weaknesses

A lack of product diversification is KO’s greatest weakness. While Pepsi has been able to diversify into other segments, Coca-Cola relies on the beverage industry for its profits and future growth.

Another problem (or weakness) is Coca-Cola’s need for massive amounts of pure water. In a world with shrinking supplies of potable water, the company’s need for water becomes critical.

Opportunities

Coca-Cola’s strengths (brand, distribution network) give it unparalleled opportunities in the developed and under-developed markets. Their superior system of production and distribution of their products (supply chain) gives them advantages to launching new products or purchasing products from other companies that could enable Coca-Cola to grow.

Threats

Water rationing or lack of water sources is Coca-Cola’s biggest threat. Without water the company would be in serious trouble.

The next biggest threat is the trend towards healthier beverages. The company must adapt to consumer preferences; including the demand for less sugary drinks.

Conclusion

(updated September 2017)

Coca-Cola is ranked #304 (out of 343) overall and #39 (out of 43) in the Consumer Defensive sector by the Dividend Analyzer.

KO has experienced falling revenues and earnings for several years now. The company had been of the most consistent and profitable companies in the world. The profitability and consistency of this company has caused investors to bid the price up to the point where there is no margin of safety. Given the high stock valuation the company will have to outperform to provide even average stock returns in the long run. This is unlikely given the current competitive climate.

I would consider Pepsi (PEP) a more attractive alternative for diversified dividend portfolios that want to own one of the two companies.

Type of Investor / Recommendation

Large Diversified Dividend Portfolios / AVOID
Looking For Exposure to Consumer Defensive Sector / AVOID
Deep Value Investors / AVOID

Portfolio Position Disclosures:
DVB Foundation Portfolio: None
DVB Dividend Growth: None
DVB High Income: None
Arbor Asset Allocation Model Portfolio (AAAMP): None

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Disclaimer: While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.
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