Company Description: The Coca-Cola Company is the world's largest soft drink company. KO also has a sizable fruit juice business.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
KO is trading at a premium to all four valuations above. However, the stock is trading at a 11.1% discount to its calculated fair value of $46.04. KO earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section, there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
KO earned one Star in this section for 3.) above. KO earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 52 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
KO earned a Star in this section for its NPV MMA Diff. of the $1,101. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 8.1% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.31%. KO earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Memberships and Peers: KO is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Dr Pepper Snapple Group (NYSE:DPS) with a 2.9% yield, PepsiCo, Inc.(NYSE:PEP) with a 3.1% yield and Fomento Economico ADR (NYSE:FMX) with a 3.2% yield.
Conclusion: KO earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks KO as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $53.38 before KO's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 52 years of consecutive dividend increases. At that price the stock would yield 2.3%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.5%. This dividend growth rate is lower than the 8.1% used in this analysis, thus providing a margin of safety. KO has a risk rating of 1.50, which classifies it as a Low risk stock.
Coca-Cola is one of the most recognizable names in the world. KO is able to deliver products to more than 200 countries around the globe through an extensive direct distribution network that has few peers. Its world presence, particularly in faster-growing emerging markets, will be relied on to compensate for declining consumption of carbonated beverages in the North American market as the result of changing consumer preferences, heightened health consciousness, obesity concerns and growing regulatory pressures.
The company should continue to make progress of its refranchising of the U.S. bottling system in 2014. These transactions will likely reduce operating income by approximately 1% in 2014. However, it will drive higher operating margins in the long term since the bottling business has significantly lower operating margins than the concentrate business.
In 2014, the company plans to increase marketing investments and improve package and product innovation to boost its sparkling beverage volumes. Management announced during the first-quarter conference call that only 5% of its total incremental marketing spend for 2014 was deployed in the first quarter. Expect KO to ramp up both quality and quantity of its marketing spend in the remaining quarters.
At 63%, KO's free cash flow payout is above the 60% I look for and its debt to total capital at 54% is above my 45% threshold. Both have increased by one point since my last review. However, KO remains a desirable stock and I will continue to give it consideration when it is trading at or below my calculated fair value price of $46.04.
Full Disclosure: At the time of this writing, I was long in KO (2.9% of my Dividend Growth Portfolio) and also long PEP. See a list of all my dividend growth holdings here.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my disclaimer for more information.