Coca-Cola Will Regain Investor Confidence

| About: The Coca-Cola (KO)


Despite the negative growth in revenues Coca-Cola once again beat analyst estimates by 1%.

Coca-Cola’s largest contributor in revenue, the North America segment, failed to report any growth in revenue despite heavy marketing.

Coca-Cola still has the healthy dividend yield from previous 25 years with high payout ratio.

Quarterly recap

Coca-Cola (NYSE:KO) delivered earnings of $0.64 per share for the second quarter of 2014. This was slightly above analysts' estimates of $0.63 per share and up 1% from the figure reported in the second quarter of 2013. Despite of 3% growth in global sales volume Coca-Cola's second-quarter revenues fell 1% from the figure reported in the second quarter of 2013 and reported revenues of $12.57 billion. Coca-Cola's shares traded down by more than 3% after the company announced its results for the second quarter of 2014. The Board of Directors of the Coca-Cola Company declared a regular quarterly dividend of 30.5 cents per common share.

Wins and woes

In second quarter of 2014, global unit case volume was flat in North America. Despite heavy marketing around the world and the launch of the Share a Coke campaign, Coca-Cola is still struggling with unimpressive sales volume in several segments. This decline in domestic volume was partly because of the decline in Diet Coke sales. Analysts expected volume to be up 1% to 2% in North America, the region that accounted for 45% of the total revenue in the second quarter of 2014. Although, the company did improve its numbers domestically but according to Chairman and Chief Executive Officer Muhtar Kent, there is still more work to be done. Moving forward, several developing and emerging markets experienced solid volume growth in the second quarter of 2014. China experienced 9% volume growth for the quarter while the Middle East, South Africa, and Pakistan enjoyed double-digit volume growth. Coca-Cola's non-carbonated beverages continued to report positive performances during the second quarter of 2014. The company's worldwide non-carbonated beverage volume grew by 5% and its sparkling beverage volume grew 2% for the quarter.

Despite Coca-Cola's sparkling beverage volume growth, domestic carbonated soft drink sales have experienced a decade-long decline. Coca-Cola is exploring one creative alternative to growing its sales. In February 2014, Coca-Cola and Keurig Green Mountain signed a decade-long agreement to roll out Coca-Cola's portfolio of products for use in Green Mountain's upcoming Keurig's Cold Beverage system. While Coca-Cola considers this partnership an opportunity to boost overall sales in future, it remains to be seen whether this alliance will boost the domestic consumption of Coca-Cola products.

Looking ahead

Analyst anticipate adjusted EPS will fall by $0.02 in the latter half of 2014 due to the restructuring of the company's Russian juice operations and the separation of its Brazilian bottling operations last year. During the first half of 2014, Coca-Cola generated $4.5 billion in cash from operations. Coca-Cola returned $1.3 billion to shareholders in the form of share repurchases and affirmed that it's on track to achieving close to $3 billion in share repurchases by the end of 2014. Coca-Cola's stock currently pays a dividend yield of 2.9%.

Dividend Yield

Coca-Cola has a dividend yield of 2.9%. The company has the 40th highest dividend yield out of 128 top businesses with 25 years of dividend payments without a decline. Coca-Cola's yield of nearly 3% is appealing to income investors in today's low interest rate environment. Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields.

Earlier this year the board approved the company's 52nd consecutive annual dividend increase, raising the quarterly dividend 9% from $0.28 to $0.305 per share. This is equivalent to an annual dividend of $1.22 per share, up from $1.12 per share in 2013. The increase reflects the board's confidence in the company's long-term cash flow.

Payout Ratio

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

The stock with high yield and low payout ratio outperformed the stock with high yield and high payout ratio. Considering Coca-Cola's yield and payout ratio I believe that in the long run Coca-Cola cannot maintain the growth in its dividend yield without the overall growth in the top and bottom lines. And in this second quarter Coca-Cola somehow managed to grow its bottom line by 1% but failed to grow its revenue.


Coca-Cola has strong revenue per share growth over the last decade, low volatility, and offers a dividend yield of nearly 3%. Investors of Coca-Cola can take advantage of the company's recent stock price decline in light of the 2nd quarter results of 2014 by buying shares at a discount to what they were trading at during the last month. Coca-Cola is still not cheap with a P/E ratio of 21.81. However, 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 still managing to grow organic revenues. Although the company faced negative growth in volume in the past few segments, the growing segments grew by far more than those underperforming segments. Therefore I believe that in the near future the company will improve the performance of its underperforming segments and regain investor confidence. I recommend buying this stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.