- Coca Cola fundamentals are still very sound with the company paying out a 3.2% dividend yield. Even if the stock falls below $35 a share in the short term, income investors would receive more.
- Net income is set to rebound this year after declining earnings since 2011. I expect this year to be a defining trend changing year for the company.
- I think there is a good chance the US could enter another recession in the near term which is why a company with sound fundamentals is a must in one's-portfolio.
- Coca Cola has excellent in-house leadership. James Quincey would make an excellent CEO once Muhtar Kent retires due to his impressive track record.
The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is down 6% already in August and the sell-off doesn't seem to want to abate any time soon. Interestingly enough, Coca-Cola (NYSE:KO) is down 3.7% in the same period (see chart below) illustrating relative strength compared to the general market.
Note: You might also be interested in our Pepsi and Coca-cola comparative stock analysis video.
Coca-Cola stock doesn't seem to be a favorable at the moment mainly because the stock has gone practically nowhere over the last 30 months or so. Nevertheless dividends continue to increase and income shareholders continue to get rewarded. The question remains - Should this stock be in your portfolio going forward? I think it should even though numbers have been weak in recent years. Coca Cola is trading at 23 times earnings but pays a dividend. I would always have a Coca Cola in my portfolio as it acts as an anchor in many respects. Lets explain why..
Firstly, let's go through the fundamentals which still look very strong over a 10 year period despite the muted growth in recent years.
|Years Of Dividend Increases||52 Years - Pass|
|Free Cash Flow||$3 billion (10-Year Trend Is Up) - Pass (Very Important For Dividend Investors - Dividend Currently Is 3.2%)|
|Revenues||$45.7 billion (10-Year Trend Is Up) - Pass|
|Profit Margins||17% - (10-Year Trend Is Up) - Pass|
|Price History of the stock||Up 89% in the last 10 years excluding dividends - Pass|
|Healthy balance sheet||Total assets = $93.5 billion (10-Year Trend Is Up) - Pass|
|Resistant to recessions?||Sales hardly affected during the recession of 2008 - Pass|
The one metric where it has been struggling over the last 3 to 5 years has been its net income which is projected to come in at $7.6 billion in 2015. Net income has been dropping since 2012 but 2015 should come in higher than 2014 which produced $7.1 billion (potential trend change about to take place). So what is the company doing in order to grow net income once more? Here are a few areas where the company is adapting and succeeding..
- Its new downsized packs have definitely been a hit. Companies like McDonald's (NYSE:MCD) and Coca Cola have had declining earnings in recent years primarily due to a change in customer sentiment (away from perceived unhealthier options). Coca Cola has responded by launching its downsized packs which have fatter profit margins. Margin is vital as it offsets revenues contraction which the company had in Q2 of this year compared to Q2-2014.
- Many international markets have much lower per capita consumption so investment has been stepped up in these regions. Earnings from Q2 showed that volumes grew in India, China, Russia and Brazil. I expect these markets to keep growing.
- In North America, the company is looking to refranchise all its bottling territories by 2020 which should free up capex even more to invest into marketing and strategic alliances (Like the Monster deal).
- Distribution is set to change in Europe with Coca-Cola European Partners PLC (or CCEP) being the entity formed from three bottlers in the company's network. Coca Cola owns one of the three participants outright (CCEAG) so it will gain an 18% shareholding in the new company. One would think that this move should increase the new entity's margins as activities could be scaled better and duplicate jobs could be axed.
Another huge reason to have this stock in your portfolio is to protect the downside as eluded to above. The US historically enters a recession every six years meaning we are due one any time soon. Coca-cola revenues only dropped 3% in 2009 and operating margins actually improved by 20 basis points which showed the company's robustness in times of economic contraction.
Furthermore the dividend pay-out ratio stayed around the 50% level in this time period which allowed investors to earn a dividend yield of 3.67% (see below) when the stock dropped to under $20 a share.
I just don't see interest rates rising in the US any time soon, especially with this latest sell-off. The labour force in the US is at historic low levels which is why I'm not surprised that food stamp cases are on the rise even though the unemployment rate is reported to be falling. Fundamentals and historic performance in one's stock selection is essential right now as the dollar and the US economy have been propped up by the powers to be over the last 18 months. Soon enough, we will see if the economy can stand on its own legs which I doubt it will.
Management is changing internally also with James Quincey recently assuming the role of chief operating officer. This guy has an excellent track record delivering positive revenue growth in Europe over the last 24 months despite falling volumes. Furthermore he spearheaded the forming of Coca-Cola European Partners PLC (mentioned above) which is sure to lower costs for bottling as a whole in Europe where Coca Cola has almost a 20% stake. Quincey now looks the frontrunner for the CEO position when Muhtar Kent decides to retire because current president (Ahmet Bozer) has announced that he will be leaving the company next March. Leadership is vital in business and Quincey has shown he has the quality in spades.
I just think that this company's vision is strong and definitely achievable when you consider that the strength of the dollar (which has been hurting international sales) has put downward pressure on recent numbers. More than half of Coca-Cola's net revenues come from international markets so when we finally get some dollar weakness, you would think that earnings would grow in these markets. Its non-carbonated beverage portfolio is also growing and I just feel the company has its finger on the pulse on what products to bring to market and what deals to do with other companies. Undoubtedly bears point to the fact that a $50k investment in this stock back in the year 2000 only turned into approximately $60k after 10 years with dividends re-invested. However this company has had nowhere near the run up other equities have had since 2009 which is why with ever increasing dividends and an ambitious but attainable growth plan, this stock in my view would act as an excellent anchor at this moment in time.
While many investors are bullish on the US economy and the US dollar, recent action in the dollar may be illustrating a potential breakdown (see chart below). The dollar is precariously close to breaking through its 200 day moving average which may mean a new secular bear market for the currency. Dollar weakness would help Coca Cola's international sales as 55% of its sales come from countries outside the US.
To sum up, this stock may not outperform to the upside during stock market rallies but it has proven its worth when stock markets have collapsed sharply. This company has ample cash flows to continue to raise dividends even in times of economic turbulence. I recommend Coca-Cola stock as a strong anchor in a dividend portfolio especially now as the dividend yield could hit all time highs.