Coca-Cola Still Facing Some Headwinds, But Taking Action

Summary

• The Coca-Cola Company is the world's largest soft drink company, and also has a sizable fruit juice business.
• During its Q3 conference call, management announced the expansion of its productivity initiatives and plans to streamline its operations to drive revenue and profit growth.
• In mid-December, management reiterated its October warning that earnings growth will fall short of the long-term target in both 2014 and 2015.

Linked here is a detailed quantitative analysis of Coca-Cola Company (NYSE:KO). Below are some highlights from the above linked analysis.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value, along with the following 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. The stock is trading at a 13.2% discount to its calculated fair value of $48.64. 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 No. 3 above. KO earned this 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 $1,149. 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 one year to equal an MMA yielding an estimated 20-year average rate of 2.98%. KO earned a check for the key metric "Years to >MMA," since its one year is less than the five-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 (DPS) with a 2.3% yield, PepsiCo, Inc (PEP) with a 2.7% yield, and Fomento Economico ADR (FMX) with a 3.7% 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 $57.05 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 2.1%.

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 5.2%. 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 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.

During its third quarter conference call, management announced the expansion of its productivity initiatives and plans to streamline its operations to drive revenue and profit growth. The company is targeting $2 billion in annualized savings by 2017 and $3 billion by 2019. Management announced that it is progressing well on the plan.

In mid-December, management reiterated the October warning that earnings growth will fall short of the long-term target in both 2014 and 2015. Full-year 2014 adjusted earnings per share (EPS) growth is now expected to be in the range of 4% to 5%, before currency translations. The company also expects to buy back shares worth $2.5 to $3.0 billion in 2015.

KO's free cash flow payout at 66% (up from 63%), is above the 60% I look for, and its debt to total capital at 56% (up from 54%) is above my 45% threshold. 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 $48.64.

Disclosure: At the time of this writing, the author was long KO (2.6% of my Dividend Growth Portfolio) and PEP. (See a list of all his 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.