Tuesday, December 29, 2015

The Coca-Cola Company (KO) Dividend Stock Analysis

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

Company Description: The Coca-Cola Company is the world's largest soft drink company, and 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 earned one Star in this section for 3.) above and 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 53 consecutive years.

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 is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 24.9% discount to its calculated fair value of $57.96. KO earned a Star in this section since it is trading at a fair value.

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 $1,531. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as KO has. The stock's current yield of 3.03% exceeds the 2.51% estimated 20-year average MMA rate.

Peers: The company's peer group includes: Dr. Pepper Snapple Group (DPS) with a 2.1% yield, Pepsico, Inc (PEP) with a 2.8% yield and Fomento Economico ADR (FMX) with a 1.4% 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 $68.77 before KO's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 53 years of consecutive dividend increases. At that price the stock would yield 1.9%.

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 3.7%. This dividend growth rate is lower than the 8.2% used in this analysis, thus providing a margin of safety. KO has a risk rating of 1.75 which classifies it as a Medium 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.

KO's free cash flow payout at 68% (flat with prior review), is above the 60% I look for and its debt to total capital at 64% (up from 60%) 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 $57.96.

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.

Full Disclosure: At the time of this writing, I was long in KO (2.6% of my Dividend Growth Portfolio) and also long PEP. See a list of all my dividend growth holdings here.

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Tags: KO, DPS, PEP, FMX,


  1. 1.75 which classifies it as a Medium risk stock.

    Am I the only one that is surprised by KO being considered medium risk?

    1. The soda business is in the throes of change. Hi-cal, high-sugar drinks are in decline. KO has the resources to pivot to other beverages and is doing so. But sugary drinks have been the cash cow for decades. Consciousness about the diabetes epidemic, reaching downward to ever-younger victims, is the driver. So the risk is: can KO replace the lost revenue from traditional sources?

  2. Soft drinks will continue to come under pressure for health reasons, esp. diet sodas. Millennials could avoid soda drinks for more fruit based beverages.


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