Coca-Cola: It Finally Happened

| About: The Coca-Cola (KO)
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I have said I have been waiting for shares to dip under $40 for some time, and now that has happened.

Time to pick your spots.

For the long-term we need to watch performance and I detail key metrics from Q3.

Would love to see a further dip.

Coca-Cola (NYSE:KO) is a dividend growth machine that I started covering last fall with a buy rating, especially if you could get shares for under $40. I have said of course that shares appeared that would be tough to acquire under $40 but that chance has arrived. It finally happened. The stock has been a tough investment lately as it has been a name that has moved sideways to down here in 2016. But for those seeking a safe investment for income, Coca-Cola has to be on the list and the yield is now hitting 3.5%. Remember that when I started coverage I stated that Coca-Cola was a name that "you buy for income/dividend growth. Capital appreciation is secondary." And friends, Coca-Cola is a sparkling example of a dividend growth name. I continue to think that the stock is best served in a long-term, tax deferred account like an IRA, with the ultimate goal of reinvesting the dividends and amassing a large position. But is this stock worth holding?

The short answer is yes, but I would go so far as to say this stock is approaching a real buying opportunity. I said under $40 I liked it. That hasn't changed. But as the stock continues to fall, let it. Buy incrementally. Now, long-term is the buy worth it? For the long answer to this question I will examine the recently reported results and discuss the outlook for the stock. Let me start with some highlights. First the company saw revenue of $10.63 billion which beat analyst expectations by $9 million, but it was also down 7.0% year-over-year. Ouch. Earnings continue to be strong, with Q3earnings coming in at $0.49, which was a $0.01 beat against estimates.

But we need to dig deeper. What is going on with the revenue? Well the company saw organic revenue growth of 3% in the quarter. This was driven by 1.5 points of concentrate sales growth and 1.5 points of positive price/mix. This was positive. It is important to note that concentrate sales were in line with unit cases sales. The company also gained global value share in sparkling beverages and in still beverages in the quarter. Global sparkling beverage volume was flat, but was led by Coca-Cola soda, as well as some strength in Sprite and Coke Zero. In still beverages the company notched gains in global volume and value share. There was volume growth in all still beverage categories of 3%, with the most strength being seen in sports drinks and water.

While Coca-Cola is a sparkling example of a buy and hold dividend growth machine, it does not mean that the stock will always trade sideways. This massive pull back is a chance to start to get long the name. That said, because the name is a global company it exemplifies a company that can be hit by the impact of currency exchange issues. Such issues are a real threat for domestic companies with a lot of international sales. While this is an issue, it is one that I anticipate to be temporary, and for many companies has begun to subside. Still it weighs and could last longer than we'd all like, however. I've discussed the impact of the strong dollar in numerous articles before, but I have to say Coca-Cola is among the hardest hit due to its truly global nature. Despite some positives on volumes and spending plans implemented by the company, it was not enough to offset the impact of currency headwinds. Currency headwinds hit the company in the quarter for 2% and these currency impacts are exacerbated once again regionally.

In Europe, the Middle East and Africa, the segment saw a -2% change from last year in currency, which led to a 4% decline in reported revenues year-over-year. Ouch. In Asia-Pacific, it was a positive 4% year-over-year impact, and reported net revenues jumped 4%. Then there was Latin America which continues to see pain. Currency was -16% year-over-year and contributed to a 4% decline in reported revenues. North America remains strong with a 3% increase in revenues. No matter how you adjust it, the currency issue hurts. While it is appropriate to look at adjusted numbers, the fact of the matter is the company is bringing in less money, even if it is because of exchange rates.

The bottom line is this. Performance is not appreciably better or worse than expected. The one thing I like about Coca-Cola is that the company isn't going anywhere. There will always be ups and downs. We need to take advantage of those 'downs' for the long-term. Here we are, under $40 for the first time in a long time. The dividend continues to grow and the stock sports a 3.5% yield. That is attractive. Net share repurchases for 2016 total $1.2 billion. Now, based on this quarter's results, expects to purchase $2.0 billion-$2.5 billion of stock in 2016. That's a huge benefit to earnings per share and the ability to grow the dividend in the future. In 2016 the company sees organic revenue growth to be up 3%, down from the prior 4-5%. The net impact of acquisitions, divestitures and structural items should be 6-7%, up from 5%. The currency hit is expected to be a 2-3%. Thus we can expect absolute revenues down versus 2015. All of this said, it's a buy long-term. Thus you can still pick your spots, even if you plan to hold for 30 years. I like Coca-Cola under $40 and would love to see it hit $37-$38 to load the truck up.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KO over 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.