The Coca Cola Company (
KO), with one of the strongest brands in the world, is the largest non-alcoholic beverage company around. Established in 1886, Coca Cola has been growing sales for over a century now and has a presence in over 200 countries. The company is a dividend aristocrat, as it has increased dividends for 48 consecutive years. Ironically, while Coke has grown considerably in the past 15 years, it has been a fairly bad investment because it was valued so highly back in the 90s. Looking forward, it may be a good investment since it is currently trading at a reasonable valuation.
Over the past 3 years, Coca Cola has had a respectable 8.7% in annual revenue growth. Between 2006 and 2007, Coke grew revenue by 20%, and between 2007 and 2008, they grew revenue by over 10%. 2009 saw a decrease in revenue (and a decrease in advertising, according to their 2009 annual report), but they continued to grow profits and cash flow.
Year Earnings
2009 $6.906 billion
2008 $5.807 billion
2007 $5.981 billion
2006 $5.080 billion
Coca Cola has increased their dividend for 48 consecutive years. This puts them near the top of the dividend aristocrat list. The stock currently yields 3.26%, and they've raised their dividend by 7.3% this year.
Year Dividend Yield
2009 $1.64 3.28%
2008 $1.52 3.04%
2007 $1.36 2.50%
2006 $1.24 2.80%
Second quarter results released late in July saw total worldwide volume increase +5% -- even ahead of even the company's own expectations. Volumes led by the flagship Coca-Cola brand grew +5% as well.
The Interbrand survey placed a $68.7 billion value on the Coca-Cola brand. This name recognition effectively allows the company to sell its sugary water across the world for a hefty premium to other rivals. A vast distribution network and a 124-year history provides billions of consumers the ability to purchase a product they can trust.
This brand recognition has been quite lucrative for shareholders. The current dividend yield of about 3.1% is above the market average, and has increased for 48 consecutive years. Strong second quarter results pushed Coke's stock price near its 52-week highs, but the shares still trades at a reasonable forward multiple of 16 times expected earnings. This isn't a rock-bottom multiple, but it is fair for a company that posted net profit margins in excess of 22% and returns on invested capital close to 30% last year. The $4 billion-plus in free cash flow generated each year is used to repurchase shares, pay and grow the dividend, and for bolt-on acquisitions. The acquisition of Glaceau and its coveted Vitaminwater and Smartwater products in 2007 was a savvy move. Expect the company to have its sights set on acquiring overseas brands to supplement more stabled trade names going forward.
There are some considerable risks with the company, despite the predictability of its business. Coke spent over $4 million last quarter lobbying against taxation on sugary drinks, and Pepsi is taking the high road against Coke by pulling soda out of high schools while Coke is leaving soda in there (but agreeing to pull out of primary schools). Most prominently, their flagship brand, Coca Cola, is becoming outdated. People in North America are drinking fewer carbonated beverages, and opting instead for energy drinks, tea, juices, or just water. The company has finally realized this trend, sadly behind Pepsi, but in time to start fixing their situation. They're investing in healthier brands, but there is considerable risk that Coke's top brands may falter over the years. They have to rely on international sales and new healthy beverages in order to grow. There isn't much room for disappointment when the P/E is over 18.
On July 22, The Board of Directors of The Coca-Cola Company declared a regular quarterly dividend of 44 cents per common share. The dividend is payable October 1, 2010, to share owners of record as of September 15, 2010.
This is equivalent to an annual dividend of $1.76 per share, up from $1.64 per share in 2009. The dividend reflects the Board's confidence in the Company's long-term cash flow. The Company returned $5.3 billion to shareowners in 2009, through $3.8 billion in dividends and $1.5 billion in share repurchases.
As for 2010, operating income is expected to increase in a 10 to 12 percent range, with mid single-digit growth in North America and high single-digit growth in Europe. Corporate operating expenses are expected to be below prior year. The company expects revenue to increase at a low single-digit rate, with mid single-digit growth in Europe and flat to low single-digit decline in North America. The company now expects strong free cash flow of approximately $900 million and capital expenditures of approximately $1 billion. Interest expense is expected to decline. The effective tax rate for 2010 is expected to be approximately 26 percent.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1968, The Coca Cola Company has indeed managed to double its dividend payment every seven years on average. The dividend payout ratio remained above 50% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Coca Cola is a fairly good dividend growth investment right now. They've got the highest profit margins in the industry, a strong brand, extreme international exposure, diversified brands, and solid growth. The P/E is only a little over 18, which is somewhat of a premium, but not bad for this caliber of company.
