After looking at 2 smokers and 2 phone companies, I’ll look at the July stock analysis for the refreshing taste of Coca-Cola! With a stalled economy and the concerns around the US debt debate, I think you are better off trading in your computer for a bowl of chips with a Coke by the pool and enjoy your summer. I bet Obama won’t have much time to do it this year!

 

So here we go with the Coca-Cola (KO) stock analysis:

Coca-Cola (KO) Stock Description:

Well, I guess you know by now what the most popular product of Coca-Cola is, but did you know that the company sells over 400 different brands and more than 3,000 products? KO is the largest manufacturer, distributor and marketer of non-alcoholic beverages (Carbonated soft drinks, non-carbonated soft drinks, tea and coffee drinks along with bottled water). From an investment perspective, they have been raising their dividend yield for 49 consecutive years, which gives them a place of choice among the dividend aristocrats.  While most of their products seem to be mature (such as Coke), they seem to age pretty well and the company continues to find growth through product diversification, brand acquisition and developing emerging markets. Remember how cool it was to have a coke 50 years ago? Well a similar phenomenon is being seen in China and other emerging markets.

 

Coca-Cola Ratios and Financial Info:

 

Coca-Cola Dividend Metrics:

–          Current Dividend Yield: 2.80%

–          5 year Dividend Growth

–          1 year Dividend Growth: 9.05% (most recent 6.80% this year)

 

Coca-Cola Metrics :

–          Sales Growth: 13.32% (1 year), 15,91% (5 years)

–          Earnings Growth 12.74%

–          P/E Ratio: 18.53%

–          Margin Growth: -0.21%

–          Payout Ratio: 34.4%

–          Return on Equity: 42.32%

–          Debt to Capital Ratio: 0.16

 

Coca-Cola Stock Metrics:

–          Ticker: KO

–          Price:  $67.67

–          Trend (technical analysis): recent uptrend

Coca-Cola Upcoming opportunities and dangers:

When I look at KO, the very first thing that comes to my mind is that it can easily replace bonds in my portfolio. Being part of the dividend aristocrats and currently having such a solid balance sheet that creates a huge stabilizing effect in one’s investments. If you think that the dividend yield is a bit low compared to what I’m usually looking for (over 3%), you’ll understand why I’m making an exception:

If you had purchased Coca-Cola only 5 years ago during the summer of 2006, you would have paid a price around $42 while receiving a $1.24 dividend (which was paying a similar dividend yield as today; 2.95%). However, since Coca-Cola increases its dividend each year, if you have been holding the stock since 2006, you would already have a stock paying 6.58% in dividend yield as of today. So you don’t have to wait forever and you get a high yield dividend paying stock without having to take much risk. Dividend Growth Investor also demonstrates that Coca-Cola has the ability to double its dividend every 7 year since 1967! With continuously growing sales and a tight balance sheet, I assume it is safe to expect Coca-Cola to keep increasing its dividend throughout the years.

KO also does a great job at coping with its flaws. In my opinion, its biggest flaws is that most of their beverages are not good for health if consumed on a daily basis (unless you to go the gym everyday to burn all those calories and sugar!). However, with the recent purchase of Vitaminwater in 2007, they are diversifying their lineup through healthier products.

On top of that, while facing a similar challenge as the cigarette industry with a saturated and developed internal market, there is a lot of room with the emerging markets for Coca-Cola

Coca-Cola has been pretty effective in controlling their costs as well. Another big challenge they face is the cost of corn syrup (which is the magic ingredient in most soda pop), aluminum and plastic for their bottling activities. Considering the price of corn is meant to go up, corn syrup should also follow the same direction. The company has been working very hard to reduce their cost of production and now expect to slowly increase their price in order to cope with the cost of corn going up. The good news is that while KO has demonstrated their ability to control their costs, all their competitors (Pepsi, Nestle, Dr Pepper) are also stuck with the same issue. Therefore, the vote of confidence will go to the best cost controller and most probably the leader in the industry; Coca-Cola!

Final Thoughts on KO

Do I have to say that I really like what I see when I analyse Coca-Cola? After the recent sales of my RIM shares, I’m looking for my next move. I am seriously considering adding KO to my portfolio! What about you?

 

Disclaimer: I am not long on KO yet ;-)

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16 Comments   |  

16 Comments

Ben
July 18, 2011, 3:39 pm

I’m long KO. Being Canadian, the only thing I don’t like about holding KO is the US taxes taken on the dividends :)

I’m still learning a lot about investing but KO has been one of the stocks that makes it to many investors top10 dividend holding that I read about.

Your analysis just proves that I made a good decision, yeah!

July 18, 2011, 5:45 pm

I’m long KO, and it’s surprisingly a small holding of mine. I’d love to add more, but I rarely find it “on sale”. It is, however, one of those rare companies that is usually worth the premium it seems to so often sell for.

Good luck if you decide to initiate a position with Coke!

Mike
July 18, 2011, 6:56 pm

@Ben and Dividend Mantra,

It seems that KO should be in everybody’s portfolio!

Ben, maybe you should consider having KO in your RRSP or TFSA?

Ben
July 19, 2011, 3:06 pm

@Mike, it is actually part of my TFSA and I still got US taxes taken out of the dividends. I thought TFSA were tax exempt but is it possible that it doesn’t apply to foreign taxes?

Mike
July 20, 2011, 5:37 am

@Ben,

that is a very interesting question. I’ll do some research on that and get back to you!

MaxP
July 21, 2011, 1:14 pm

@Ben,

I think that I can help clarify the issues — I’m also Canadian and happen to be in the accounting field.

TFSA’s are NOT exempt from US withholding taxes (I know this 100%), despite this common belief. There is no way to prevent US withholding taxes within your TFSA. This is actually even worse than holding US stocks in a non-registered account, because you lose the Foreign Tax Credit that you could claim on your T1 Personal Tax Return for the US tax that was withheld, had you put the US shares in a non-registered account.

The BEST place to hold US shares is in an RRSP account.

RRSP’s ARE free of US withholding taxes, provided that you fill out some basic and simple IRS forms that your broker or discount broker can provide (IRS = US Internal Revenue Service, the US equivalent of the CRA, the Canada Revenue Agency, if you are not familiar with the terms).

You should look into whether your broker/discount broker charges a fee for “swaps” (i.e. you swap equivalent holdings between your accounts, (i.e. TFSA and RRSP), thereby NOT triggering any tax consequences).

For example, if you own $5,000 of KO shares in your TFSA and also happen to have $5,000 of cash (or money market fund units) in your RRSP. You ask you broker to “swap” the $5,000 cash TO the TFSA and the $5,000 of KO shares into your RRSP account. Fill out the required IRS forms (I believe the forms are called IRS Form W8-BEN), and the US dividends will have ZERO withholding taxes (ie. you will receive 100% of the dividend amount, rather than 85% (Total dividend LESS 15% US withholding tax).

Hope this helps you out.

Cheers,
Max

Ben
July 21, 2011, 8:14 pm

@MaxP, thanks! I’ll look into that for sure. I only hold 2 US stocks for now so I might as well transfer them ASAP and save some $$$

July 22, 2011, 4:02 am

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Bernard Lai
February 20, 2012, 10:33 pm

Hi there Mike!

I am thinking about holding KO in my RRSP account.
I was wondering if you are reinvesting your dividends for KO?
KO seems to charge a lot of fees for full DRIP and I want to synthetically DRIP KO.
Do you know which canadian brokers will synthetically DRIP KO?

Mike
February 21, 2012, 12:24 am

Hey Bernard!

I don’t (I want more cash to buy other dividend stocks at the moment). Wait for this Wednesday post about RRSP and US stocks. You’ll get your answer (hint: Questrade does it ;-) ).

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