Seeking Alpha
Long only, long-term horizon, newsletter provider, dividend investing
Profile| Send Message|
( followers)

Summary

  • Coca-Cola reported a constant currency revenue increase of 3% for the 2nd quarter of 2014.
  • The company plans to buy back between $2.5 billion and $3.0 billion of shares in 2014.
  • Coca-Cola is the global leader in beverages based on brand value and market capitalization.
  • The company experienced strong growth in the Asia Pacific region.
  • Coca-Cola has not lost market share in still beverages in North America in 17 quarters.

Coca-Cola (NYSE:KO) had the 3rd most valuable brand in the world in 2013 according to Interbrand, with a brand value of $79 billion. Coca-Cola's market cap is about $186 billion, meaning that over 1/3 of the company's value comes directly from its brands. Coca-Cola is the industry leader in soft drinks based on market capitalization. The company's nearest competitor (NYSE:PEP) has a market cap of $136 billion, but sells both snacks and beverages whereas Coca-Cola sells only beverages.

2nd Quarter Results

Coca-Cola posted favorable 2nd quarter results. Constant currency adjusted revenue increased 3%, worldwide volume growth was up 3%, and sparkling (carbonated) volume was up 2% globally, with a 1% volume increase of Coca-Cola in the US.

Coca-Cola grew sparkling beverage volume 2% globally by leveraging its sponsorship of the FIFA world cup. Sprite posted the strongest volume gains, with a 6% increase. Fanta volume grew 2%, and Coca-Cola volume was up 1%. Coca-Cola operations are split geographically. The Asia Pacific and Eurasian regions realized the largest gains for Coca-Cola. The company managed to keep volume flat in the developed world despite declines in the overall sparkling beverage industry.

Asia Pacific

Coca-Cola is doing very well in the Asia/Pacific region. Sparkling volume increased 10% in China for the quarter on strength from the Share a Coke campaign. Asia Pacific volume grew 8% for the quarter overall. Coca-Cola increased sparkling volume 9% in the region, and still volume 7%. The company's ability to grow its flagship sparkling brands in China point to a long growth runway in the region for Coca-Cola.

Eurasia & Africa

The company's other bright spot is the developing markets of Eurasia and Africa. Coca-Cola grew volume 5% in this region for the quarter. Gains came from deeper market penetration brought on by the FIFA world cup advertising campaign. Sparkling beverages grew a modest 3%, while still beverages were up 12% in the quarter.

Europe

The company's European segment posted mixed results for the 2nd quarter. Northwestern Europe, Germany, and Iberia posted small volume growth. Central and Southern Europe volume declined 4% for the quarter. As a whole, Coca-Cola's European segment posted no volume growth for the second quarter.

Latin America

Like Europe, Latin America volume was even for the quarter. The company's South American business units performed well, growing volume 8%. Volume in Brazil was even due to strong competition. Volume in Mexico declined 3% due to the company's institution of an excise tax. Despite these setbacks, still volume increased 3% for Latin America, and a 1% decline in sparkling beverages.

North America

Coca-Cola gained market share in the sparkling category for the 2nd quarter of 2014 in North America. Despite gaining market share, sparkling volume was flat. Still beverage volume increased 1%. Coca-Cola's still portfolio has either held or grown market share for 17 consecutive quarters. Not only does Coca-Cola North American have dominant sparkling brands, they have dominant still brands as well.

Shareholder Return

Coca-Cola has a current dividend yield of 2.96%. The company announced it expects to buy back between $2.5 billion and $3 billion worth of shares for the full year of 2014. This amounts to around 1.5% of the company's market cap at current prices. Coca Cola has already completed about $1.5 billion worth of net share repurchases this year, and has another $1 billion to $1.5 billion expected for the next two quarters.

Source: Coca-Cola 2nd Quarter Earnings Release

Consecutive Years of Dividend Increases

Coca-Cola has increased its dividend for 52 consecutive years, one of the longest active streaks of dividend increases. The company's history of profitable growth shows that Coca-Cola can adapt to changing consumer tastes and preferences while paying ever increasing dividends.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Coca-Cola has a dividend yield of 2.96%. The company has the 40th highest dividend yield out of 128 businesses with 25+ years of dividend payments without a reduction. Coca-Cola's yield of nearly 3% is appealing to income investors in today's low interest rate environment.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Coca-Cola has a payout ratio of about 65%, which is the 94th lowest out of 128 businesses with 25+ years of dividend increases without a reduction. The company's relatively high payout ratio means Coca-Cola will not be able to increase its dividends faster than overall company growth.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Coca-Cola has grown revenues per share by about 9% per year over the last decade. This strong revenue growth is the 10th highest out of 128 businesses with 25+ years of dividend payments without a reduction. Coca-Cola's strong revenue growth shows it is able to gain market share and reach consumers in developing markets despite overall declines in the soda industry.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Coca-Cola has a long-term standard deviation of 18.71%, the 9th lowest out of 128 businesses with 25+ years of dividend payments without a reduction. Coca-Cola's low volatility shows evidence of a business with highly predictable cash flows.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

Coca-Cola is a buy and Top 10 stock based on the 8 Rules of Dividend Investing. The company has had strong revenue per share growth over the last decade, low volatility, and offers a dividend yield of nearly 3%. Investors in Coca-Cola can take advantage of the company's recent stock price decline in light of 2nd quarter results by buying shares at a discount to where they have traded over the last month. Coca-Cola is still not cheap, with a P/E ratio of 22.5, but it is an extremely high quality business that returns a great deal of its earnings to shareholders in the form of share repurchases and dividend payments while managing to grow organic revenues.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Coca-Cola's 2nd Quarter Price Decline Is A Buying Opportunity