Dividend Stock Analysis: The Coca-Cola Company

As Christmas is approaching, the sounds of the music rings in that the year is almost over.  I am still sitting on a sizable cash position that I am looking to deploy into an undervalued dividend stock – the one with the right metrics, that shows undervaluation, is performing better than the past, etc. Furthermore, there are investors who have capital built up, including myself, and I never like to let cash sit idle. Given this, I am constantly trying to find the right company, to invest my money, to gain value and build a dividend income stream. In my attempt to find a consumer-based company, one that will generate significant volume and revenue when economic times are good and bad, I turned to an iconic branded company.  This iconic branded company has been around for 130+ years and is also coined as one of the, “Dividend Aristocrats”, having increased their dividend for 25+ years.  In fact, this iconic company has delivered a streak of 55+ years of increasing their dividend.  Yes, I am talking about The Coca-Cola Company (KO).

The Coca-Cola Background

  • One of the longest-company histories, dating back to 1886.
  • Coca-Cola remains one of the most iconic brands, with their Coke products, as well as Dasani water, Minute Maid, Sprite, Vitamin Water, to name a few.
  • Coca-Cola is expected to deliver close to $8 billion in net earnings in 2018, via their bottle restructuring, as well as their zero-based budgeting program.

What is the current story on Coca-Cola?  Well, they have been in the discussions of big brand companies faltering a bit.  Declining revenues and increased competition, such as Pepsi (PEP), they have had a fun battle as of late, to maintain their market share in the beverage space.  From 2015-2017, they have watched revenues and net income decline, each and every year.  What has happened in that time frame?  Consumer tastes have shifted from sugary drinks, to energy-based beverages and more nutritional tastes; causing a decline in Coke’s revenues.  Further, Coke has been on an acquisition spree, buying Honest Tea, Monster beverage, Suja-life and recently announced – Costa Coffee (in England).  Additionally, their stock price in 2018 alone has actually increased 7%, from $45.88 to $49.09 (as of 12/7).  Very interesting, in deed.  Therefore, I’ll go through their recent earnings release, which will cover 9 months ended September 30th and see if their financial performance is strong and, of course, their dividend metrics meet the qualifications that I seek. Before investing, I want to see increase in revenue/earnings and an increase in liquidity, if possible. For the dividend metrics, outlined below, I would like to see if they fit each criteria established.

The Coca-Cola Company Financial Analysis

For our analysis, we’ll begin with liquidity, from a balance sheet perspective, and then will transition to their revenue & net income performance. At prior year-end, Coke’s current assets were $36.5 billion, with current liabilities of $27.2 billion. Then, after this quarter-end, the current assets went down to $33.4 billion and current liabilities actually dramatically increased to $31.4 billion, due to a massive increase in current maturities of long-term debt of $3 billion. Therefore, the current ratio at the end of the year was 1.34 and slid to 1.06. My criteria or preference is usually greater than 1, and they do exceed this. We will now look at the quick ratio, which excludes inventory. If inventory is slow to move and they hold on for too long – impairment could exist and/or limited ability to meet current financial needs. Therefore, current assets, less inventory, at the end of the prior fiscal year was $33.8 billion, and this decreased to $30.8 billion. Therefore, the quick ratio was 1.24 and decreased to 0.98. The 0.98 ratio is still very impressive, given I usually don’t require the same ratio as the current ratio (at 1) and typically set a 0.50-0.75, which they far exceed, still. Therefore, I will conclude that their balance sheet is strong.

Time to shift to their financial performance through for this fiscal year. From their earnings report, Tyson recorded $24.8 billion versus the $27.9 billion through 9 months last year. This is a decrease of $3.1 billion.  Management has pointed that this is due to bottler re-franchising, and that organic sales is actually up 6%.  Reason being, when you subtract out the revenue, for Non-GAAP purposes, from the bottler restructuring, revenues are $22 billion versus $21 billion, hence the 6% increase.  How about their bottom-line, though? They have net earnings of $5.6 billion versus $4 billion, or an increase of 40% from last year. When reviewing the cause or trends from the financial statements, their costs were down incredible this year (as part of their zero-based budgeting initiative) with SG&A down $2 billion through 9 months!  Taking that, plus a slight decrease in income taxes due to the Tax Cuts Jobs Act, Coke is welcoming a large increase to their net income.

Not so fast, though. Given we are the Dividend Diplomats, what about that side of the equation? Since this is a dividend stock analysis, we have to place them through our Dividend Diplomats Stock Screener. This will help identify if KO is an undervalued dividend growth stock. Our stock screener uses four simple screens to identify the stocks: P/E ratio (valuation), dividend yield (what they currently pay), dividend payout ratio (company’s ability to grow their dividend), and their dividend growth rate/history of increasing their dividend (to validate their practice of increasing their dividend over a period of time).

The Coca-Cola Company Dividend Analysis

  1. Dividend Yield: We will use the current price of $49.09 (12/07). KO’s current dividend is $1.56 per year. This calculates to a dividend yield of 3.18%. This is higher than the S&P 500 average yield (the market, as a whole) and is higher than most savings or short-term CDs out there. I love the yield, that’s all I have to say.
  2. Payout Ratio: Typically, we use a 60% payout ratio threshold for stocks to pass our screener. At $2.08 estimated earnings per share, based on the average of 26 analysts reviewing the company, the payout ratio is only 75%, based on the $1.56 dividend.  This is on the higher end on the payout ratio scale we like to see and is definitely in the red zone.  Not alarmingly high that a cut will ensue, but not sure how much room they have to increase this dividend going forward.
  3. Dividend Growth Rate And History: Now, they are a dividend aristocrat and tout a 55+ years of increasing their dividend streak. Taking this into consideration, the 5-year dividend growth rate is a 6.86%. They have increased their dividend recently by 2 cents per share, per quarter, and have had this same-type of dividend increase for the last 4 years, i.e. increasing 2 cents per share, per quarter.  Therefore, they are more in the 5-5.50% dividend growth rate, on average.  If they do another 2 cent increase, that represents a 5.1% growth, pushing the payout ratio to 78% on current year expectations or 73% for 2019’s earnings expectations.
  4. Price to Earnings Ratio (P/E): At a current price of $49.09, with expectations of $2.08 in earnings, this equates to a P/E ratio of 23.6. This represents where the S&P 500 is around, currently.  I typically like to see below 20 and definitely below the market as a whole.  Therefore, this is not showing a sign of undervaluation.

The Coca-Cola Company’s Analysis & Conclusion

I love their legendary status, that they have.  Increasing a dividend for 55+ years is no easy feat, and they are one of few that fit that category.  Further, their brands are strong and continue to be strong, as I know many individuals who still drink their diet coke, the Honest Tea and Dasani water.  Competition is stiff, and we have seen the impact on their top-line performance.  However, they are doing things that provide high expectations for 2019, with their re-franchising of the bottlers and the continued cost initiative, as we have seen it working in this most recent earnings release.

Additionally, their balance sheet is very strong.  They have a significant amount of liquidity and can go through any “difficult” storm that may be brewing.  They didn’t persevere through every recession for no reason.  They have a smart management team that knows how to manage the balance sheet particularly well.

However, from a dividend metric standpoint, their payout ratio is high, growth rate is declining and their price to earnings ratio is slightly higher than what I would like.  This makes this analysis even more difficult.  Love their brand, strategy and performance, but I may not like their dividend metrics, currently.

In conclusion, I will monitor their share price, as I’d like to see them lower, at the $40 range (which means waiting for a STEEP discount), which would allow a 4% yield, and then offer more of a being paid to wait on future results, as well. Therefore, and sadly, they will not be receiving a capital infusion from me and I will not be adding them to my portfolio at current price levels. How about you, the readers? What do you think of Coke?  Do you still believe in their iconic brand and future performance?  Would love to hear your thoughts, please share them below! Thank you again for stopping by, good luck and happy investing!

11 thoughts on “Dividend Stock Analysis: The Coca-Cola Company

  1. Great analysis. I am a long time owner and agree with your current price target. I plan to hold for the long term and think their cost cutting initiatives and exit from the more capital intensive bottling business will pay off in the future with growing earnings and dividends. Tom

  2. wow great analysis.

    I dont drink much coke other than with fast food. Dasani water aint for me, to overpriced…..

    Its a classic stock but when you compare it to pepsi. I think pepsi takes the cake with their diversification into snacks.

    look forward to seeing where you decide to allocate your funds.


    • PCI –

      Thank you for the comment. I own Pepsi and love their deep product lines that they have. Still watching KO, but never has been at a price point that appealed to me. Looking forward to seeing it drop more, if it does, that is, haha.


  3. I currently own KO but it is my third smallest position; I’d like to add more but I agree with your analysis and price target in order for me to invest more of my capital. I’m happy to continue holding in the interim though, and do like their recent acquisition of Costa Coffee (although one can argue they overpaid).

    I am also a customer as Diet Coke is my preferred soft drink, although I don’t drink nearly as much of it these days (but am sipping one now as my wife and I had a lunch date today).

    • DivvyD –

      Definitely too high, right now, but yes – coffee is smart, as it’s a critical product for those in the beverage industry. Wonder if we’ll have Costa Coffee in our stores? Or maybe I’ve been too oblivious to notice it yet : )


  4. Hi DD,

    I like KO and I have been a longtime shareholder. At the current valuation I’m not planning to add more shares, but I might add some in the future when the valuation is a bit lower.
    I’m a big fan of Cherry coke so I support the company!


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