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Overview

The world population will reach 7 billion in 2011. We take the opportunity to analyze a global company that will profit from the growing world population and growing emerging markets: The Coca-Cola Company (NYSE:KO). At $62.92, KO is trading at 29.26% from its all-time high of $88.94 reached on July 15, 1998.

The company manufactures, distributes and markets non-alcoholic beverage concentrates and syrups. It also manufactures, or authorizes bottling partners to manufacture, fountain syrups, which it sells to fountain retailers such as restaurants and convenience stores, which use the fountain syrups to produce finished beverages for immediate consumption, or to fountain wholesalers or bottlers, which in turn sell and distribute the fountain syrups to fountain retailers. In addition, it manufactures certain finished beverages, such as juices and juice drinks and water products, which it sells to retailers directly or through wholesalers or other distributors, including bottling partners.

KO has long been and remains more than ever a global company. Already in 1991, 63.95% of the company’s sales came from outside the United States. In 2009, if we exclude the “Bottling Investments” segment, the proportion of sales of KO coming from outside North America was 63.72%.

Here are Coca-Cola Company’s 2009 sales proportions by operating segments and 1991 sales proportions by geographic area.

Operating Segments
2009
Eurasia & Africa
6.40%
Europe
13.90%
Latin America
12.00%
North America
26.40%
Pacific
14.60%
Bottling Investments
26.40%
Corporate
0.30%

Geographic Area
1991
Africa
1.78%
Northeast Europe/Middle East
3.53%
European Community
28.85%
Latin America
9.53%
United States
35.65%
Pacific & Canada
20.27%
Corporate
0.40%
Volatility and Past Returns
KO is not a volatile stock. A non-volatile stock doesn’t necessarily mean bad returns for the investor and/or no enrichment. The volatility of KO is measured by its beta ratio of only 0.60, which signifies that the stock has a theoretical volatility 40% lower than the market. We compared the return of KO with the market (NYSEARCA:SPY) from the years 1994 to 2011 YTD (as of January 7). We have also included the return of KO for the years 1991, 1992 and 1993. All paid dividends are included in the returns.
Civil year
The Coca-Cola Company
Market
1991
74.65%
N/A
1992
5.77%
N/A
1993
8.19%
N/A
1994
17.14%
0.33%
1995
45.88%
37.71%
1996
43.11%
22.35%
1997
27.78%
33.35%
1998
1.36%
28.49%
1999
-12.10%
20.32%
2000
5.79%
-9.70%
2001
-21.45%
-11.78%
2002
-5.32%
-21.54%
2003
17.77%
27.88%
2004
-15.98%
10.54%
2005
-0.50%
4.70%
2006
22.77%
15.61%
2007
30.01%
5.16%
2008
-23.76%
-36.38%
2009
29.53%
26.05%
2010
18.47%
14.82%
2011 (As of January 7)
-4.33%
1.11%
Over the 18 periods observed, KO outperformed the market 10 times. An investment made in KO on December 31, 1993 had a return of 252.99% on January 7, 2011, while an investment in SPY for that same period had a return of 238.42%. If we look at the last 11 years, an investment made in KO on December 31, 1999 had a return of 29.85% on January 7, 2011, while an investment in SPY for that same period had a return of only 1.82%. All the paid dividends are included in these returns.
EPS and Dividends
Let’s have a look at the past EPS, dividend per share and payout ratio of KO in the first table, and at the dividend growth in the second one. (All amounts are split adjusted for the 2-for-1 stock splits of May 13, 1996 and May 12, 1992.)
Year
Diluted EPS
Dividend per share
Payout Ratio
1991
$0.61
$0.24
39.34%
1992
$0.63
$0.28
44.44%
1993
$0.84
$0.34
40.48%
1994
$0.99
$0.39
39.39%
1995
$1.18
$0.44
37.29%
1996
$1.40
$0.50
35.71%
1997
$1.64
$0.56
34.15%
1998
$1.42
$0.60
42.25%
1999
$0.98
$0.64
65.31%
2000
$0.88
$0.68
77.27%
2001
$1.60
$0.72
45.00%
2002
$1.23
$0.80
65.04%
2003
$1.77
$0.88
49.72%
2004
$2.00
$1.00
50.00%
2005
$2.04
$1.12
54.90%
2006
$2.16
$1.24
57.41%
2007
$2.57
$1.36
52.92%
2008
$2.49
$1.52
61.04%
2009
$2.93
$1.64
55.97%
2010
$3.31 (Estimated)
$1.76
53.23%

Civil Year
Dividend Growth
1991 to 1992
16.67%
1992 to 1993
21.43%
1993 to 1994
14.71%
1994 to 1995
12.82%
1995 to 1996
13.64%
1996 to 1997
12.00%
1997 to 1998
7.14%
1998 to 1999
6.67%
1999 to 2000
6.25%
2000 to 2001
5.88%
2001 to 2002
11.11%
2002 to 2003
10.00%
2003 to 2004
13.64%
2004 to 2005
12.00%
2005 to 2006
10.71%
2006 to 2007
9.68%
2007 to 2008
11.76%
2008 to 2009
7.89%
2009 to 2010
7.32%

The 2010 estimated EPS of $3.31 reflects the three quarters already completed with EPS of $2.59 plus the average analyst estimates for the Q4 EPS at $0.72. From 1991 to 2010 (2010 estimated), the compound annual growth rate was 9.31% for the company’s EPS, which is excellent. However, the EPS growth was not necessarily constant or linear over the period. In a more recent past, each year since 2003, KO grew its year over year EPS except in 2008. The current EPS growth trend is solid.
The average payout ratio for the years 1991 to 2010 (2010 TTM) has been 50.04%. Each year since 2003, the payout ratio of KO is around or a little above the 50% mark.
If we look at the dividend per share, from 1991 to 2010, the company increased its dividend at a compound annual growth rate of 11.05%, which is excellent. If we take 1991 as a starting year, the company increased its dividend each year since 1991. Over the last nine years, the minimum year-over-year dividend increase has been 7.32%, and six years out of nine had a year-over-year dividend increase in the two-digit growth rate. KO has a clear “official” dividend policy: Usually, the dividend is increased for the first date of payment of the year. The dividend payment dates are April 1, July 1, October 1 and December 15 of each year. KO is a powerful dividend payer.
With an annual dividend of $1.76, a TTM EPS of $3.25, and a TTM payout ratio of 53.23%, the company has flexibility to increase the dividend, and this one is safe. The current yield of KO is 2.80% while the current yield of SPY is 1.78%.

Sales and Shares Outstanding
As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year over year. Buybacks of shares are also important to boost future EPS. Quarters after quarters, shareholders of a company that repurchased its shares become less and less diluted. Here are the Coca-Cola Company’s sales by year from 1991 to 2010 (2010 TTM). You will also find the weighted average shares outstanding -- diluted, the sales/share and the price/sales (P/S) ratios for the years 1991-2010 (2010 TTM).
Year
Sales
Weighted average shares outstanding – diluted
Sales/Share
P/S
1991
$11,572,000,000
2,666,000,000
$4.34
4.62
1992
$13,074,000,000
2,634,000,000
$4.96
4.22
1993
$13,963,000,000
2,603,000,000
$5.36
4.16
1994
$16,181,000,000
2,580,000,000
$6.27
4.11
1995
$18,018,000,000
2,525,000,000
$7.14
5.20
1996
$18,546,000,000
2,494,000,000
$7.44
7.07
1997
$18,868,000,000
2,515,000,000
$7.50
8.89
1998
$18,813,000,000
2,496,000,000
$7.54
8.89
1999
$19,805,000,000
2,487,000,000
$7.96
7.32
2000
$20,458,000,000
2,487,000,000
$8.23
7.40
2001
$20,092,000,000
2,487,000,000
$8.08
5.84
2002
$19,564,000,000
2,483,000,000
$7.88
5.56
2003
$21,044,000,000
2,462,000,000
$8.55
5.94
2004
$21,962,000,000
2,429,000,000
$9.04
4.61
2005
$23,104,000,000
2,393,000,000
$9.65
4.18
2006
$24,088,000,000
2,350,000,000
$10.25
4.71
2007
$28,857,000,000
2,331,000,000
$12.38
4.96
2008
$31,944,000,000
2,336,000,000
$13.67
3.31
2009
$30,990,000,000
2,329,000,000
$13.31
4.28
2010 (TTM)
$32,135,000,000
2,336,000,000
(Latest indicated)
$13.76
4.78

The compound annual growth rate of the sales of KO has been 5.52% for the period 1991-2010 (2010 TTM). This is overall a correct growth rate higher than inflation.
If we look at the weighted average shares outstanding – diluted of the company, we can see that the company slightly repurchased its shares over time, but definitely not at an aggressive rhythm like some other companies do. The company primarily returns value to its shareholders via dividends rather than aggressive share buybacks. The company has today 330,000,000 less outstanding shares than in 1991.
The average price/sales (P/S) ratio is 5.50 for the period 1991-2010 (2010 TTM). If we focus on a more recent past, since 2002, the average P/S ratio of the company is 4.70. Actually, with a P/S of 4.57, KO is slightly below its short term average.
Company’s P/E
Let’s have a look at the historic P/E of KO.
Year
P/E at year-end
1991
32.89
1992
33.24
1993
26.57
1994
26.01
1995
31.46
1996
37.59
1997
40.66
1998
47.18
1999
59.44
2000
69.25
2001
29.47
2002
35.64
2003
28.67
2004
20.82
2005
19.76
2006
22.34
2007
23.88
2008
18.18
2009
19.45
2010
20.24 TTM
2011
19.36 TTM
For the period 1991-2011 YTD, we have 21 periods of P/E with an average of 31.53. Over the period, we can clearly see that the P/E of KO remains high. During the nineties and until 2003, the P/E of KO was pretty high with a peak of 69.25 in 2000. Since 2004, the average P/E for the company is 20.50 and each year since 2004 the P/E of KO has been extremely constant around this average. The actual TTM P/E of 19.36 suggests the stock is well valuated by the market at the moment. Moreover, a P/E in that range clearly suggests the market anticipates growth for the company; otherwise the P/E would be lower.
Balance Sheets and Market Capitalization
Here are the company’s balance sheets for the fiscal year 1991, 1995, 2000, 2005 and 2010 MRQ (October 1). We have also included the sales, the net income, the weighted average common shares outstanding and the market capitalization at year-end.
[Click to enlarge]
Over that long period, KO has been an excellent wealth creator for its shareholders. We can see this by the increase of the market capitalization of the company. From $53.49B in 1991, the market capitalization reached $146.1B on January 7, 2011. The company increased its value by constantly increasing its assets, liabilities, stockholders’ equity, sales and net income over time. The actual market capitalization of the company at $146.1B is well above its stockholders’ equity of $27.91B, which is book value. That means the market gives a very strong value to the brand “Coca-Cola,” which is an intangible asset. KO shareholders became wealthier with the rising net income of the company, which pushed up the market capitalization of the company with a rising share price, and that produced an excellent return over the period.
World Population and Growth
In 2011, the world population will reach 7 billion. If we analyze the growth of the world population by year and compare it with the annual sales of the company, we get an interesting “sales per capita ratio.” Here is a table showing the information:
Year
World Population
Annual Sales
Sales per Capita Ratio
2025
8,000,000,000
?
?
2011
7,000,000,000
$39,600,000,000 (Estimated)
$5.66
2006
6,500,000,000
$24,088,000,000
$3.71
1999
6,000,000,000
$19,805,000,000
$3.30
1995
5,700,000,000
$18,018,000,000
$3.16
1990
5,300,000,000
$10,236,000,000
$1.93
1985
4,850,000,000
$5,879,000,000
$1.21
It is interesting that over the years, the “Coca-Cola sales per capita ratio” has only increased. From $1.21 in 1985, this ratio would reach $5.66 in 2011. (The 2011 estimated sales of $39.6B reflect the average analyst estimates). The world population would reach 8 billion in 2025. If we apply a hypothetical “sales per capita ratio” of $7.00, the annual sales would be $56B in 2025 (8B X $7.00). If the outstanding shares of the company remain at 2,336,000,000, this would give a sales/share of $23.97. With the company’s short term average P/S of 4.70, this would give a stock price of $112.66.
The point here is not to find a perfect target price for the stock. The point is to show that the growth of the world population for the coming years should contribute to push up the stock price. For the coming years, Coca-Cola’s long investors can pocket a very decent annual rising dividend while enjoying growth.
Key Measures of the Fundamentals
Here is a summary of different key measures of the fundamentals of KO compared to its main competitor: PepsiCo, Inc. (NYSE:PEP). The most advantageous measures (KO versus PEP) have their numbers highlighted.
Measure
The Coca-Cola Company
PepsiCo, Inc.
Actual spread from all-time high
29.26%
16.79%
Actual spread from year high
4.49%
2.53%
Actual spread from year low
27.19%
13.00%
P/E (TTM)
19.36
16.72
Yield
2.80%
2.89%
Dividend Growth (2009 to 2010)
7.32%
6.29%
Dividend Growth (2008 to 2009)
7.89%
9.38%
Dividend Growth (2007 to 2008)
11.76%
18.52%
Payout Ratio (TTM)
53.23%
46.97%
Profit Margin (TTM)
23.59%
12.06%
Operating Margin (TTM)
28.22%
15.35%
Current Ratio (MRQ)
1.34
1.05
Debt/Equity (MRQ)
0.48
1.21
ROA (TTM)
11.61%
10.70%
ROE (TTM)
29.24%
36.27%
Overall, these two companies both have strong fundamentals. KO remains 29.26% less expensive than its all-time high, while PEP is 16.79% less expensive than its all-time high of $79.79 reached on January 10, 2008. KO has a higher TTM P/E than PEP but as previously stated, the current P/E of KO near its short term historic average suggests the stock is well valuated. Both companies have a similar current yield. During the last three years, PEP increased its dividend at a higher growth rate than KO two years out of three. The payout ratio of KO is slightly higher than the payout of PEP.
For the measure of the profitability and the financial strength, KO has better figures than PEP. KO has a very strong TTM profit and operating margin of 23.59% and 28.22%, respectively. Its MRQ current ratio is 1.34 and the company has a MRQ debt/equity ratio of only 0.48.
For the measure of management effectiveness, KO has a TTM ROA of 11.61%, slightly above PEP at 10.70%. With a TTM ROE of 29.24%, which is still excellent, KO is below the ROE of 36.27% for PEP.
Conclusion
The fundamentals of the company are all great: The stock is trading at 29.26% from its all-time high of $88.94 reached 12 and a half years ago, low volatility, good past return of the stock, current yield at 2.80%, safe and rising dividend, growing EPS and sales at record levels, global company with a high proportion of the sales coming from foreign markets, correct P/E, strong profit and operating margin, current ratio and ROE, low debt/equity ratio, and finally, considering the growing world population and the fact the company sells ultimately to individuals, that can only be profitable for the company’s future.
Philosophy
When you have a soft drink on a hot summer afternoon, or each time you see fast food restaurants get crowded, being a shareholder of a company like KO can give you the opportunity to get some return from your paid beverages in the form of dividends and profit from a thirsty growing world population in the form of capital appreciation.
Source for company description: Morningstar, Inc.

Disclosure: I am long KO, SPY.

Additional disclosure: No position in PEP.
Source: Coca-Cola: Growing World Population Means Growth for the Company