The Federal Open Market Committee (FOMC) announced on June 20, 2012, that it would extend Operation Twist by six months and assured to help the economy if needed. How did the markets react? Stocks started to sell off immediately after the announcements, luckily recovering towards the end of the session on that day. Stock markets globally have been swinging wildly like in response to comments from central bankers, be it the ECB in Europe or FOMC in the US.
In such times, investors should go for dividend stocks that have potential for growth. The volatility in the commodity and energy stocks compels one to stay away those sectors, and instead look into dividend paying stocks in the technology sector (in fact there is a true growth story in Seagate (STX) with 4% dividend) or for less volatility, Consumer Staples.
Technology has been more volatile lately, maybe because of all the disappointment stemming from the Facebook (FB) IPO. I think there is a case to be made for the relative stability that the Consumer Staples sector provides. If you want a less volatile portfolio and yet earn income, you should look for companies in this sector, especially ones that pay good dividends. One such company is The Coca-Cola Company (KO).
KO is the world's largest producer of soft drink products and juice related products. The company has expanded their product line impressively - licensing and marketing 500 different brands worldwide. For example, just recently on June 20 2012, Coca Cola announced it will distribute high protein milk drink named "Core Power" in the US (an interesting development considering that PepsiCo (PEP) also announced recently that it will launch yogurt brand in the United States).
Some of the company's most popular brands include Coca-Cola series drinks (classic, caffeine free, Zero, Diet, Cherry), Powerade, Fanta, Full Throttle, Sprite series drinks (classic, Diet Sprite, Zero), Fresca, Barq's, Mello Yello, Pibb Xtra, Tab, Aquarius, Vitaminwater and Smartwater, Schweppes, Canada Dry and Crush.
When comparing with PepsiCo, it is important to note that Coca Cola has performed better than Pepsico in the recent years because PepsiCo's input costs - grains - are more complex considering its heavy investment in the snacks business. KO's input costs are relatively simpler. The price of sweeteners have risen in the first two quarters of 2012, while other input commodities such as aluminum and juice have dropped during the same period. KO expects that some cost synergies coming from their acquisition of US bottling operations of Coca-Cola Enterprises (CCE) will improve their margin for 2012 and 2013.
The company's operating revenues have grown on a compound annual rate of 12.7% and the adjusted EPS has grown at a 9.4% rate in past four years. There should be a continued positive trend of 3% to 4% volume growth and a 6% to 8% operating income growth. The EPS is expected to continue to grow in the high single digits in 2012 and beyond.
KO currently trades at about 19 times earnings, which is below its historic average forward P/E of 22 times earnings. KO's dividend yield is about 2.7% and the company has consistently increased both its earnings and dividends. In fact, 2012 marked Coca-Cola's 50th consecutive year of annual dividend increases, pushing it closer to 3%, which is impressive.
KO could see a sales growth of about 5% for the next two years. Although there are concerns that operating income could be adversely affected by foreign exchange, the industry estimates an EPS of $4.10 in 2012, which is more than the $3.84 2011 EPS. The 2013 EPS could be as high as $4.40 or more.
Applying the current P/E to the 2013 EPS estimate, KO has good potential to climb to as high as $85 in the next 12 months, and is a good low volatility play in this challenging economic environment considering its stable and solid dividend that it offers.
Investors should note that the biggest risk to this trade for the next few quarters will be a worse than expected adverse impact due to foreign exchange fluctuations, because a majority of KO's operating profit comes from countries other than the US.