After looking at two smokers and two phone companies, I’ll look at the July stock analysis for the refreshing taste of Coca-Cola (KO). With a stalled economy and the concerns around the US debt debate, I think you are better off trading in your computer for a bowl of chips with a Coke by the pool and enjoy your summer.
I guess you know by now what the most popular product of Coca-Cola is, but did you know that the company sells over 400 different brands and more than 3,000 products? KO is the largest manufacturer, distributor and marketer of non-alcoholic beverages (carbonated soft drinks, non-carbonated soft drinks, tea and coffee drinks, bottled water). From an investment perspective, it has been raising its dividend yield for 49 consecutive years, which gives it a place of choice among the dividend aristocrats. While most of its products seem to be mature (such as Coke), it seems to age pretty well and the company continues to find growth through product diversification, brand acquisition and developing emerging markets. Remember how cool it was to have a Coke 50 years ago? A similar phenomenon is being seen in China and other emerging markets.
- Current dividend yield: 2.80%
- Five-year dividend growth
- One-year dividend growth: 9.05% (most recent 6.80% this year)
- Sales growth: 13.32% (one year), 15.91% (five years)
- Earnings growth: 12.74%
- P/E ratio: 18.53%
- Margin growth: -0.21%
- Payout ratio: 34.4%
- Return on equity: 42.32%
- Debt to capital ratio: 0.16
- Stock Metrics
- Price: $67.67
- Trend (technical analysis): Recent uptrend
Upcoming opportunities and dangers
When I look at KO, the very first thing that comes to my mind is that it can easily replace bonds in my portfolio. Being part of the dividend aristocrats and currently having such a solid balance sheet creates a huge stabilizing effect on one’s investments. If you think that the dividend yield is a bit low compared to what I’m usually looking for (over 3%), you’ll understand why I’m making an exception.
If you had purchased Coca-Cola only five years ago, during the summer of 2006, you would have paid a price around $42 while receiving a $1.24 dividend (which was paying a similar dividend yield as today, 2.95%). However, since Coca-Cola increases its dividend each year, if you have been holding the stock since 2006, you would already have a stock paying 6.58% in dividend yield as of today. So you don’t have to wait forever and you get a high-yield dividend-paying stock without having to take much risk. Dividend Growth Investor also demonstrates that Coca-Cola has the ability to double its dividend every seven years since 1967. With continuously growing sales and a tight balance sheet, I assume it is safe to expect Coca-Cola to keep increasing its dividend throughout the years.
KO also does a great job at coping with its flaws. In my opinion, its biggest flaw is that most of its beverages are not good for health if consumed on a daily basis (unless you to go the gym every day to burn all those calories and sugar). However, with the purchase of Vitaminwater in 2007, it diversified its lineup through healthier products.
On top of that, while facing a similar challenge as the cigarette industry with a saturated and developed internal market, there is a lot of room with the emerging markets for Coca-Cola. Coca-Cola has been pretty effective in controlling costs as well.
Another big challenge it faces is the cost of corn syrup -- the magic ingredient in most soda pop -- and aluminum and plastic for its bottling activities. Considering the price of corn is meant to go up, corn syrup should also follow the same direction. The company has been working very hard to reduce the cost of production and now expects to slowly increase its price in order to cope with the cost of corn going up. The good news is that while KO has demonstrated its ability to control costs, all its competitors are stuck with the same issue. Therefore, the vote of confidence will go to the best cost-controller and most probably the leader in the industry: Coca-Cola.
Do I have to say that I really like what I see when I analyze Coca-Cola? After the recent sales of my RIM (RIMM) shares, I’m looking for my next move. I am seriously considering adding KO to my portfolio.