I am starting a weekly series called, "The Forever Holds", in which I'll comb through the entire stock market looking for stocks you can literally hold forever. Well, maybe not forever, but for at least 30 years. I am doing this for a few reasons. The concept of the Forever Hold came to me when a friend's grandfather passed away, and she inherited her ancestor's assets. There were a few stocks in the portfolio that had been purchased in the 1950s and, after multiple splits, had cost bases of pennies a share. Despite 60 years of market turmoil, and even the financial crisis, all of these stocks had returned multiples of their original investment.
Yet not all stocks will behave like this. All of these stocks had certain things in common. They all produced products that somehow are wrapped up in human DNA. They are each an intrinsic part of our daily lives, all across the globe. The fact that they withstood the devastating market of the 1970s, the dot-com bubble and the financial crisis speaks to their durability. I literally want a portfolio that I can feel is purchased with the intent to pass on to my kids and to their kids.
So, is The Coca Cola Company (NYSE:KO) a Forever Hold?
1) Is it intrinsic to everyday life? Yes. It's a beverage and everyone needs to drink. That alone may not suffice since one may as well purchase a water company. What is intrinsic is that Coke is a recreational drink that people enjoy all over the world, and the company doesn't just sell its own soda.
2) Is it a global brand? Yes. You can't go to Sri Lanka without someone there knowing about it.
3) Is there room to grow? Yes. A lot. The key to Coke is that the company doesn't just sell Coke. Its range of products include Fanta, Dasani, Bacardi Mixers, Mello Yello, Enviga, Five Alive, Full Throttle, Fuze, Godiva Coffee/Chocolate drink, Hi-C, Lift, Minute Maid, Nestea, Odwalla, Seagram's, Simply Orange and Smart.
4) Are the financials truly outstanding? Coca-Cola carries $15.7 billion in cash and $16.3 billion in debt at a nominal interest rate. Trailing 12-month cash flow was $6.2 billion, so the debt service is no problem. The company also had 1.5 times the amount of free cash flow necessary to pay its 2.6% dividend.
5) What about 30 years from now? My vision is that Coke will have extended its tendrils even deeper into every corner of the world than it already has. I thought it had done that 20 years ago when I first bought the stock. I was wrong. If sales ever flag, the company can just purchase another branded drink, or create a new product. Every time I think a new beverage can't be created, 10 more appear.
There are two noteworthy owners of the stock. One of them is Warren Buffet. Berkshire Hathaway (BRK.B, BRK.A) holds a massive stake in Coke—some 200 million shares worth some $15 billion. The other owner is InterActiveCorp's (IACI) Barry Diller.
How about comparisons with other competitors? PepsiCo Inc. (NYSE:PEP) is the obvious candidate. However, its long-term growth rate is half that of Coke's, it has 25% the cash and 125% of the debt of Coke. Most important, its net margins of 9% are half that of Coke's. There's no comparison in my eyes. Moreover, I don't think an ETF like Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) will yield the same results over time.
If we put an 8 P/E on Coca-Cola to match its long-term annualized growth rate, I think we are not giving it the deserved premium considering its consistent history of free cash flow, global brand name, extraordinary management, and confidence in the company in the form of Barry Diller and Warren Buffett's ownership. I say it deserves a P/E of 11.
On projected 2017 earnings of $6.62 per share, factoring in the 2.7% compounded dividend yield reinvested, we get a price target of right about $73. Coke is priced almost 10% above that right now.
So as a present-day value, Coke is overpriced. As a Forever Hold, it fits the bill.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.