Expect Coke's Stock to Rise over the Next Five Years

Coke (KO) has grown earnings at an annualized rate of 8.72% since 1999; growth has been stable and progressive with the economic cycle having little to no impact on earnings growth. Dividends have grown at 9.87% annualized over the same period. The stock is yielding over 3% at present; this compares with median dividend yields of 2.43% over the past decade, and a reversion to median yields could come from price appreciation. The expected 2009 payout ratio is 54%; not low, but not unreasonably high so the dividend is safe.

The company returns value through a mix of dividends and buybacks. The buyback program is smart – 2003 to 2006 were periods during which buybacks were in operation, years during which the annual average price was at $40 and below. No buybacks have occurred while the stock traded at a premium to intrinsic value during 2007 and 2008. The balance sheet is strong with a debt to debt plus equity ratio of just over 13%.

In my view there is potential appreciation to $75 to $80 by 2014. This translates to a return potential of over 10%, including dividends. As money flow chases risk, the stock might under-perform and if it does, $47 is a decent enough entry point; though I’d feel happier at $44. $44 is a slight premium to intrinsic value and I believe the stock quality, stability and growth in earnings, demand the premium. In my estimation, downside risks are limited to $36 level; this level can be attractive for bottom fishers.

Please refer to KO on the Quant Report for insight into numbers referred to above.

Disclosure: No Holdings.

Comments

[Warnin4U:]

Let us pray that increases in KO aren't due to the devaluation of the US dollar.

Sep 23 08:32 AM

[pftittl:]

I don't think it will see $44....

Sep 23 03:59 PM

[Doom Blogge...:]

How is that a return potential of over 10%. That is more like over 40%

Sep 24 04:54 PM

[Shiv Kapoor:]

10% is the approx annualized return. Absolute return will be > 40%.


On Sep 24 04:54 PM Doom Bloggers s**** wrote:

> How is that a return potential of over 10%. That is more like over
> 40%

Sep 24 06:11 PM