5 Reasons To Add Or Overweight Coca-Cola

| About: The Coca-Cola (KO)

Coca-Cola (NYSE:KO) is one of the most prolific if not the best known brands in the entire world. The company is very consistent in delivering large cash flows and loved by both professional and retail investors.

Years TTM 2012 2011 2010 2009
Free Cash flow 7944 7865 6554 7317 6193

Because of this, it's not often, that the company trades below fair value. However I believe that if you want to add this iconic company to your portfolio currently there is an opportunity to do so.

It only trades at a slight discount to fair value but if you want to add a company with this kind of beta and resistance to economic adversity to your equity portfolio you might consider the price attractive. Five reasons the company is attractive as a long term investment:

1. International Growth

Although Coca-Cola consumption is declining in the USA, international markets are making up for this and driving growth for the company. Emerging middle classes in emerging markets are picking up the habit of drinking Coke.

2. Strong Distribution Network

Coca-Cola has a distribution network in place across 200 countries that is not rivaled by many and will be very costly to duplicate for competitors. Regarding non-alcoholic beverages only PepsiCo, Inc. (NYSE:PEP) comes close.

3. Trustworthy Dividend Payer

Coca-Cola pays a respectable dividend yield of 2.7% It also hold about $4 per share in cash and debt is relatively low. The dividend is not likely to suffer anytime soon.

4. Financially Sound

Coca-Cola is financially sound with very low risk of default. Because Coca-Cola acquired bottling operations their debt has increased but as shown in the graph below it's quite manageable at 3 x EBITDA.

KO Financial Debt to EBITDA Chart
(Click to enlarge)

KO Financial Debt to EBITDA data by YCharts

5. Attractively Valued

After performing a DCF calculation basing forward numbers on 10 year historical averages for Coca-Cola, the shares appear to be worth $42.71 apiece. In addition Coca-Cola has $4.14 / share in cash. Although part of the cash is required to conduct business, not all of it is. Going by this calculation, the shares are slightly undervalued.

In addition as you can see on the graph below the Coca-Cola PE ratio is not very modest and it's usually trading at a below average beta.

KO PE Ratio TTM Chart
(Click to enlarge)

KO PE Ratio TTM data by YCharts


Making the case that Coca-Cola is a great company is not very hard anymore. Warren Buffett has been saying it for years and Coke has been showing it. The drink is entirely ingrained in society.

The hard part of investing in Coke is doing it when it's fairly valued or trading below fair value. It looks like now is a good time to initiate a position when looking for a company with Coke's risk profile, to add to your portfolio. It's not a given to outperform the S&P 500, but it might offer favorable returns at relatively low volatility.

The current price of $41.93 appears to be favorable either to initiate a position or add to an existing one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , , , Beverages - Soft Drinks
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