Image Source: PixabayCompany Description: The Coca-Cola Company (KO) 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:
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 only 3.) above. Since KO’s tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 21.1% premium to its calculated fair value of $43.67. KO did not earn any Stars in this section.
Dividend Analytical Data: In this section, there are three possible Stars and three key metrics:
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 earned one Star in this section for 3.) above. KO 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 61 consecutive years.
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:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of $281 is below the $500 target I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 3.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.75%. KO earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.
Peers: The company’s peer group includes: Keurig Dr Pepper Inc (KDP) with a 3.0% yield, Pepsico, Inc (PEP) with a 3.0% yield and Fomento Economico ADR (FMX) with a 2.0% yield.
Conclusion: KO did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section, and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks KO as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $46.34 before KO’s NPV MMA Differential increased to the $500 minimum that I look for in a stock with 61 years of consecutive dividend increases. At that price the stock would yield 4.0%.
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 4.8%. This dividend growth rate is higher than the 3.4% used in this analysis, thus providing no 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 84% (up from 75% in the prior review), is above the 60% I look for and its debt to total capital at 60% (down from 63% in the prior review) is above my 45% threshold. It is currently trading at a premium to my calculated fair value price of $43.67. Before adding to my position I will wait until its dividend metrics improve.More By This Author:Microsoft Corporation Dividend Stock AnalysisConsolidated Edison, Inc. Dividend Stock AnalysisKimberly-Clark Co. Dividend Stock Analysis