Dividends4Life: Stock Analysis: The Coca-Cola Company (KO) An Excellent Value

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Linked here is a PDF copy of my detailed analysis of The Coca-Cola Company (KO) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Coca-Cola Company engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide.

Fair Value: I consider 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 discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, KO is trading at a slight discount. KO earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
KO earned two Stars in this section for 3.) and 4.) above. KO has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 46 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

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)? 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 one Star in this section for 1.) above. The NPV MMA Diff. of the $5,976 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 10.1% per year, it will take 7 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: KO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. KO has a strong balance sheet and cash flows as a result of a relatively stable market with a dominant market share around the world. Volumes in KO's non-carb portfolio should continue to grow as the company expands distribution of its Energy Brands unit. KO's high exposure to international markets should offset small U.S. declines of the Coke unit. Coca-Cola Zero should drive trademark Coca-Cola volumes worldwide. Risks would include slower than planned growth and adverse foreign currency exchange rates.

Conclusion: KO earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks KO as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $53.95 and KO's NPV MMA Diff. would still be around the $3,000 NPV MMA Diff. that I like to see. At that price KO would yield 2.82%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate
the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 8.1%. This dividend growth rate is below the 10.1% used in this analysis, thus providing a margin of safety.

I last reviewed KO on May 5, 2008. At that time the stock was selling for $58.77 as was rated as a 1 Star-Weak stock. At the time of this analysis, it was trading at $44.20, slightly below my $45.35 Buy Below price. At this level, KO is an excellent value.

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 had no position in KO (0.0% of my Income Portfolio) .

What are your thoughts on KO?

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  1. Anonymous // October 22, 2008 at 7:53 AM

    I'm in the process of writing a post comparing KO & PEP and one thing I've noticed right off the bat is the distance in margins (both gross & profit) between the two companies. Despite higher sales, higher dividend growth and higher book value growth for PEP, KO is kicking them in the teeth when it comes to margins. Their profit margins alone have historically been 50% higher than PEP.

    That's not the sole reason why I own KO vs. PEP, but I think KO does one thing very well and possesses Enduring Value over its competitors.

    Good analysis as always D4L!

  2. Jae Jun // October 22, 2008 at 6:01 PM

    I really like KO from a dividend point of view but in terms of value I just cant bring myself to buy it. Maybe my problem is trying to get the best of both worlds. Is this something you've considered yourself when it comes to div investing?

  3. Anonymous // October 22, 2008 at 6:54 PM

    Jae: Yes, I always consider value and the entry point. As noted above, I look at 4 value calculations:

    1. Avg. High Yield Price
    2. 20-Year DCF Price
    3. Avg. P/E Price
    4. Graham Number

    It was was fairly valued compared to 1. and 3. The DCF I calculated was $36.04 vs. a closing price of $44.20. The Graham Number I calculated was $20.81.

    Best Wishes,

  4. Anonymous // October 23, 2008 at 2:22 PM

    Why did the bottom fall out of KO today? Liquidation by Mutual Fund mangers that need to raise cash for redemptions?

  5. Anonymous // October 23, 2008 at 6:31 PM

    Anon: You may be on to something. I read earlier that a lot of the downward pressure is coming from hedge funds. The only way they can raise cash is to sell.

    Best Wishes,

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