Coca-Cola dividend growth stock, Coca-Cola stock analysisThe Coca-Cola Company (KO) is the world’s largest beverage company with brands such as Coca-Cola, Diet Coke, Fanta, Sprite, Dasani water, Glaceau Vitaminwater, Powerade and Minute Maid juices.  In fact, the company has over 500 beverage brands worldwide.  Coca-Cola has been around for a very long time and international sales account for over half of the company’s total revenues.

The Coca-Cola Company has one of the longest dividend growth streaks investors will find at 51 consecutive years and is one of my 35 Top Dividend Growth Stocks.

Dividend Growth and Current Yield

Coca-Cola currently pays a dividend of $0.28 per quarter for a $1.12 annual dividend.  At the close of market on Friday August 9th, KO’s price per share was $40.16.  This gives the stock a current dividend yield of 2.79% (1.12/40.16).

In 2003, Coca-Cola payed an annualized dividend amount of $0.44 per share.  The dividend trend has been up each year as it now pays $1.12 annually per share.  This gives KO a 10 year annual compound dividend growth rate of 9.79%.  More recently the annual dividend growth rate was 8.51% for 2011 to 2012 and 9.81% from 2012 to 2013.  This is a pretty good dividend growth rate for a company that has been able to grow their dividend annually over five decades.

Earnings Per Share Growth

Coca-Cola had a 2002 earnings per share (EPS) of $0.83 and a 2012 EPS of $1.97.  Over the 10 years their earnings per share have been consistently climbing upward.  KO has had a 10 year EPS growth rate of 9.03% which is an excellent growth rate for such a large established company.

More recently Coca-Cola’s annual EPS growth rate was 2.61% from 2011 to 2012.  Going forward, Value Line Investment Surveys has projected earnings growth of 8%.

Net Income Growth

Coca-Cola has been consistently growing net profits since 2003.  KO has a 9 year net profits growth rate of 7.28%.  Most recently KO has increased net profits by 9.68% in 2011 and 0.98% in 2012.  Over the past decade, The Coca-Cola Company has been able to almost double their total net profits for shareholders.

Sales Growth

Sales have also been trending upward for Coca-Cola over the past decade.  The compound annual growth rate of sales revenues was 9.6%.  I am amazed when researching The Coca-Cola Company that such a well established industry giant is able to continually grow EPS, net profits and revenues at a near 10% rate.  This is why Coca-Cola is one of the darlings of dividend growth investor portfolios.

Outstanding Shares

Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company.  Coca-Cola has decreased outstanding shares over the past decade by about 10%.  While Coca-Cola hasn’t been retiring a large amount of shares, they have still been reducing the share count consistently year over year.

With less shares outstanding, the value of each share still available increases.  When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits.  I like seeing that management has shown a commitment of purchasing back shares and increasing current owners percentage of the company.  Along with dividends, a decreasing share count is a way for management to return value to shareholders.

Current Ratio

Current ratio measures a companies ability to meet short term obligations.  Coca-Cola has a 2011 FYE current ratio of 1.05.  This means that current assets will be able to cover 100% of current liability obligations.  I generally want to see this number be above 1.  Basically Coca-Cola has a fairly even number of current assets to current liabilities on their balance sheet and should have no trouble covering short term obligations.

Net Profit to Long Term Debt

This number tells me how many years worth of profits it will take to pay off the current long term debt of the company.  I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not.

Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt.

For Coca-Cola this net profit to long term debt ratio stands at about 1.6 for 2012.  This means that The Coca-Cola Company would be able to pay off all their long term debt with about a year and a halfs worth of net income.  In my opinion Coca-Cola has a strong balance sheet and is a very safe company with not too much debt.

Dividend Payout Ratio

The dividend payout ratio measures the dividend per share compared to the earnings per share.  How much of a companies earnings per share are they paying out to shareholders in the form of a dividend.

The past few years KO has maintained a dividend payout ratio around 50%.  This tells me that Coca-Cola is paying out around half of their profits back to shareholders and using the other half to continue to grow the company which they have had success doing over the past decade.

Price/Earnings Ratio

The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason.  With the most recent closing market price of $40.16 and most recent EPS of $1.97, KO has a current P/E right around 20.4.  Typically the market P/E average is right around 14 so compared to the market in whole I might determine KO to be slightly overvalued.

Looking at KO’s past P/E ratios, the average P/E ratio for KO over the past decade was 19.1.  The current P/E of 20.4 is slightly higher than the past average P/E ratios.  This might lead me to believe KO is slightly overvalued.  This of course would be in line with the overall market in general at this current time.

Return Projections

Coca-Cola had EPS of $1.97 in 2012.   The past earnings per share growth rate has been roughly around 9% which was also consistent with sales and net income growth.  Therefore I am going to use an EPS growth rate of 9% over the next 10 years to figure out what 2022 EPS might look like.  This gives me an estimated EPS of $4.66 for KO in 2022.

If KO is trading at reasonable P/E ratio compared to their history of 19 in 2022 then it will have a market price of $88.54/share (4.66*19).  This will give me an estimated annual growth rate for Coca-Cola of 9.18% over the next 10 years.  If you would be happy earning a 9.18% return over the next few years along with collecting annually increasing dividend payments, then Coca-Cola might be an investment worth considering.

This is a very rough exercise based on growth estimates that may not come to reality.  Actual returns in KO will vary depending on how well the company increases their earnings and how the market values Coca-Cola in the future.

Recommendation

Based on the above analysis, I believe Coca-Cola could turn out to be a good investment for dividend growth investors over the next decade.  Due to Coca-Cola’s consistent growth and long history of dividend payments, I feel paying current stock prices for shares of Coca-Cola is a decent investment.  The company is the largest beverage company in the world.  They have a very long history of paying growing dividends to shareholders and they are still doing a very good job of growing their bottom line.  I feel this company would make a strong foundation in any dividend growth portfolio.

Personally I own a few shares of Coca-Cola that I purchased a few years ago.  Due to the company’s consistent performance, I am considering adding to my position soon.

Do you have an opinion on The Coca-Cola Company?  Please share your thoughts in the comments below!

Disclosure:  I own shares of KO.

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12 Responses to Coca-Cola Dividend Stock Analysis

  1. Dan,

    Solid analysis here.

    I think KO is fully valued here. Not a bad purchase, but no margin of safety either. It’s certainly one of the highest quality companies on can purchase, however.

    I’d love to see it come back down to about $37 a share or less. I’d definitely be interested at those levels. KO is just one of those companies that keeps doing great things.

    Best wishes!

    • Dan Mac says:

      Thanks Dividend Mantra. I agree with you here. Like you I agree that Coca Cola is fully valued here. While certainly not selling at a bargain, I believe this is one of those companies that it is worth picking up shares along the way even at fair valuations. This is one of the great companies that keeps doing everything right.

  2. Nice analysis, although I think that using 9% earnings growth for the next 10 years might simplify things too much. All the financial ratio’s and performance indicators look good so KO is definately on my purchase list.

    I sometimes wonder because KO often looks a bit overvalued. But isn’t this the premium you pay for such a solid company like KO? I am gonna buy KO in the coming week in the low 40s; I want to own shares of this company instead of waiting on those shares to become cheaper (what might never happen). What do you think?

    • Dan Mac says:

      Robin I agree with you. I used 9% based on past performance but it might have been more prudent to use something lower like possibly 6 or 7% growth.

      However, I’m completely with you on the fact that this is a great company and oftentimes does appear slightly high in valuation. Like you I feel this is just the price investors must pay to pick up shares in this great company and there are a few others that act similar. Looking over the historical numbers, this is the kind of company I want to own even if I’m not getting the greatest bargain on the purchase price. Like you, I’m also considering a purchase to add to my position sooner than later. If the price then does drop lower in the future I’ll be buying more then as well! If it doesn’t drop then I’ll be glad I bought shares at this level.

  3. Great analysis. I also agree that KO is currently fully valued, but it is such a great, dependable company that it is still worth picking up even with little to no margin of safety. I’m torn between adding to my KO position or entering into DPS as I see plenty of opportunity for growth (both organic and dividend)…looks like I have some work to do this afternoon.

  4. Nice analysis Dan, I think Warren Buffet would be proud of your recommendation of Coke. I’d have loved to see a roundup comparison between KO, PEP, and DPS. Maybe some day. Great work.

    CD

    • Dan Mac says:

      Thanks Captain Dividend. I’m not sure if Buffett reads my site but if he does I’m sure he’d approve! That’s a good idea for a comparison post on the three big beverage companies. I’ll give that some thought for the future. Thanks for the idea!

  5. CI says:

    Nice analysis and I agree with your conclusion. In fact KO is one of my top ideas at the moment. Sure it’s not cheap, but when is it ever? Another aspect I like: if the beverage trend moves toward healthy options and away from sugar sodas, KO can take advantage. The company markets a variety of healthy/low sugar options. Off the top of my head: Diet Coke, Coke Zero, Dasani, Minutemaid. Anyways, I’ve been all over the world in the military and noticed people drink this stuff everywhere!

    • Dan Mac says:

      Thanks CI. I’ve haven’t traveled all over the world but the few international places I’ve been Coke has been the popular beverage of choice. Coke and beer. That’s a good point about Coke offering a few healthier options for consumers. They also sell the VitaminWater product along with the brands you mentioned.

      I agree Coke isn’t often undervalued. With the decline yesterday, it might be a decent opportunity to pick up some shares. I’m strongly considering adding to my position.

  6. Dan, I really like Coke right now, but how would you compare it to Pepsi? Coke seems to be doing worse than Pepsi lately, but we are looking at things over the long term.

    • Dan Mac says:

      Hi Brett and thanks for the comments. I really haven’t given Pepsi a good look lately but it is definately another company on my watch list that I want to own in my portfolio. Pepsi looks fairly valued to me currently and what I love about Pepsi is that they have the beverage market and the snack market. As for me, I like to own the top companies in an industry so I would look to own both KO and PEP when I finally get the chance. I think over the long run both companies will continue to do very well.

  7. [...] dividend investor Dan Mac is big on Coca-Cola! Check out his two recent posts on the company, in Coca-Cola Dividend Stock Analysis, and Purchased Shares of [...]

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