Using The Recent Earnings Disappointment To Initiate A Position In Coca-Cola

Jul.17.13 | About: The Coca-Cola (KO)

The major advantage an individual investor has over institutional investors is time. Institutions are judged based on quarterly numbers, whereas individuals have the luxury of time. Due to these constraints, I find earnings season to be an excellent time to initiate a position in companies that may have temporarily disappointed Wall Street. An example of this is Coca-Cola (NYSE:KO), the iconic beverage maker.

Year

2004

2005

2006

2007

2008

2009

2010

2011

2012

Revenue in millions

21962

23104

24088

28857

31944

30990

35123

46554

48017

Dividends per share

.50

.56

.62

.68

.76

.82

.88

.94

1.02

Earnings per share

1.03

1.09

1.19

1.29

1.51

1.47

1.75

1.92

1.97

Shares outstanding

4818.7

4738

4636

4636

4624

4606

4584

4526

4469

Click to enlarge

The primary reason for an investment in KO is the consistent growth of the business. As we can see from the table above, aside from a temporary blip in 2009, revenue and earnings have grown at a fairly consistent clip. The beverage business is durable with no chance of becoming obsolete, such as technology companies. Furthermore, the industry contains high barriers to entry, preventing smaller niche players from gaining critical mass. An example of this would be Dr Pepper Snapple Group (NYSE:DPS), which relies on KO and PepsiCo (NYSE:PEP) for distribution of their products. An investor in KO today can reasonably predict that the business will look and run similar to what it is today.

KO Dividend Chart

The predictability of the business plays into the next reason for investment, which is dividends. KO has managed to double its payout since 2004, which adds to the company's long-term appeal. Consistency is the key, in my opinion, for those looking to build a durable income-producing portfolio to replace job-related income in retirement. With an investment in KO at the current price of $40.20 an investor will receive a yearly dividend of $1.12 per share, which works out to a yield of roughly 2.78%. The company tends to raise the dividend in the first quarter of every year, providing a nice inflation hedge.

KO Shares Outstanding Chart

The third reason for an investment in KO revolves around its capital allocation plan. KO currently pays out roughly 50% of its net profits back to shareholders in the form of dividends. KO currently has a $3.5 billion stock buyback program. While the amount is small in comparison to its overall market cap ($185 billion), the buyback acts as a support for the share price. As we can see from the chart above, the company has retired a little over 7% of all the shares outstanding.

In summary, an investor in KO today will lock in a 2.7% dividend in a safe, consistent company. KO is a wide moat company in an easy-to-understand business with high barriers to entry. The company doesn't run the risk of becoming obsolete anytime soon and, in my opinion, is an excellent addition to most portfolios.

Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Thank you for reading the article. Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.