Stock Valuation Coca Cola

The following stock valuation is about Coca Cola, a company which has an impressive dividend history and is one of the consumer giants out there. But also a company which is struggling when it comes to growth in the last years. Nevertheless I still think it should be one of the core holdings of each dividend portfolio. Recently it announced a dividend increase of 5.7% to new yearly dividend of 1.48 USD. But let’s have a look at the valuation and if it is already in my buying zone.

The Coca-Cola Company (KO) is the world’s largest beverage company. The company has more than 500 beverage products on the market including softdrinks, waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. The company was founded in 1919 and is based in Atlanta, GA. Coca-Cola is largely affected by health trends, as obesity and other health concerns reduce demand for some of Coca-Cola’s products. KO has increased its dividend since 1963.

Valuation

Currently KO is priced  at 41.72 USD per share.

Valuation_KO

If I take the weighted average of the 4 ratios according to the 5  year average the price would be at 36.7 USD. That means the current price is 13.8% above its 5 year average. The 5 year high was at 46.87 USD about 6 months ago, so currently the sock trades 11.0% below its 5-year high.

The fair market value ratio of beverage-soft drinks (consumer defensive), according to morningstar is currently at 1.06. If I divide the current price by it I will get a price of 39.36 USD.

Earnings per share growth

In 2011 the EPS were at 1.85 USD and EPS in 2016 were at 1.49 USD. This just means there was no growth in the last 5 years at all. Actually EPS decreased on average by around 4% per year.

Dividend History and Future

KO has an impressive dividend history with increasing the dividend for 54 years in a row. In the last 5 years, the average growth per year is 7.98% based on a dividend of 0.94 USD in 2011 and a current full year one of 1.38 USD. The payout ratio with 92.6% is already very high and if there will be no growth coming up in the future it will be a problem.

An important point for my buying decision is as well the dividend yield on cost, which is currently at 3.55% based on the new quarterly dividend of 1.48 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming a dividend growth of 5% per year the dividend in 2020 will be at 1.71 USD, which means a yield on costs of 4.11% before tax. From this point of view it should be a buy but the pay out ratio is a point which concerns me. But at the same time the dividend is still covered with free cashflow.

Conclusion

In general Coca Cola does not look that attractive right now, but I am convinced that KO will make it through this difficult period of no growth and will remain one of the few dividend paying machines. I also still think that especially considering the strong brand of Coca Cola and the strong fundamentals it is never a mistake to have it in the portfolio.

But would I buy it at the current price? No I wouldn’t, the yield is very attractive but currently the stock is overvalued. My entry point for KO will be at a price of around 38.00 USD, so I am hoping for further drop of 9%.

What do you think about KO? Do you already have it in your portfolio or would you buy it at its current price?

Disclosure: Long KO

I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.

1 Comment

  1. Another great analysis. Of course, KO is the single prefered stock of all online dividend income bloggers. Surprising and not: on the one hand, it is as reliable as it gets in terms of business model – everyone loves owning stocks of things apparently as solid as Coke. The valuation returns from KO, however, are rather average over the past years and it is mostly dividend income that makes this such a beloved stock.
    Question for you: what is your opinion on a monthly-income dividend ETF such as SDIV? How would the taxation situation for us Austrians wind up?

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