Coca-Cola (NYSE: KO)
QVI Research Report | Updated Coverage | February 2023
Summary
The Coca-Cola Company is a legendary global powerhouse with a ubiquitous brand name that likely is going nowhere except consumers’ refrigerators, pantries, and cupholders.
On the contrary, the stock’s total return has underperformed its sector and the broader market, while its shareholder yields are collectively below the 10-Year Treasury rate on a forward basis.
As a legacy consumer non-cyclical, Coke’s fundamentals are solid, and the downside risks are below average.
However, the elevated valuation multiples suggest a perpetually fully-priced stock.
QVI uncovers why investors hang onto Coca-Cola's shares in this updated coverage report.
Premium subscribers: When referencing this research report, access your Quality Value Investing Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on February 17, 2023, and intended for illustration only.
Coca-Cola Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
The Coca-Cola Company (NYSE: KO) is a dividend-paying large-cap stock in the beverages industry of the consumer staples sector. KO was added to the QVI Concentrated Portfolio on October 4, 2010, at a split and dividend-adjusted $20.18 a share.
The Coca-Cola Company, a beverage company, manufactures, markets, and sells various nonalcoholic and alcoholic beverages worldwide. The company sells its products under the Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, Fanta, Fresca, Schweppes, Sprite, Thums Up, Aquarius, Ciel, dogadan, Dasani, glacéau smartwater, glacéau vitaminwater, Ice Dew, I LOHAS, Powerade, Topo Chico, AdeS, Del Valle, fairlife, innocent, Minute Maid, Minute Maid Pulpy, Simply, Ayataka, BODYARMOR, Costa, FUZE TEA, Georgia, and Gold Peak brands. It operates through a network of independent bottling partners, distributors, wholesalers, and retailers, as well as through bottling and distribution operators. The company was founded in 1886 and is headquartered in Atlanta, Georgia, USA.
QVI’s value proposition elevator pitch for Coca-Cola:
Coke is a legendary global powerhouse with a ubiquitous brand name that likely isn't going anywhere except consumers' refrigerators, pantries, and cupholders.
Performance vs. Sector and Market
The chart below illustrates KO’s performance against the Consumer Staples Select Sector SPDR® Fund ETF (NYSE: XLP) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Coca-Cola in October 2010.
For example, KO has underperformed in the total returns of its sector and the broader market during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Coca-Cola’s investor relations webpage, and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Coca-Cola: Bullish.
KO Total Returns vs. XLP and SPY
Coca-Cola Co (KO) Total Return: +197.90%
Consumer Staples Select Sector SPDR ETF (XLP) Total Return: +268.30%
SPDR S&P 500 ETF Trust (SPY) Total Return: +352.60%
Since October 4, 2010KO Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
KO’s earnings yield traded below the floor at 3.66%, as demonstrated in the below chart. Moreover, at 3.65%, KO’s free cash flow yield traded well below the targeted threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that KO trades at a premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
Coca-Cola offers a modest forward dividend yield of 2.93%, supported by a higher-than-targeted 70.97% payout ratio, thus indicating a dividend rate that may be in jeopardy of annual stagnation or, worse, being cut.
KO yielded 9.12% from an annual payout of $1.84 on a split- and dividend-adjusted cost basis of $20.18 per share on October 4, 2010, the date of QVI’s initial stock coverage. Thus, QVI’s yield-on-cost basis was +619 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.82% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for KO was 3.41% or -41 bps below the 10-Year, but 5.48% or +166 bps above the Treasury yield when using the October 2010 yield-on-cost basis.
QVI’s shareholder yields rating for KO: Neutral.
KO Shareholder Yields
Coca-Cola Co (KO) Price: $60.12
Coca-Cola Co (KO) Earnings Yield: 3.66%
Coca-Cola Co (KO) Free Cash Flow Yield: 3.65%
Coca-Cola Co (KO) Dividend Yield: 2.93%
One-Year TrailingCoca-Cola Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Coca-Cola had positive three-year annualized revenue growth of 6.98%, underperforming the 11.90% median growth for the consumer staples sector.
Nonetheless, Coca-Cola had a trailing three-year double-digit net profit margin of 23.45%, trouncing the sector’s median net margin of 4.12%.
Returns on Equity and Invested Capital
Coca-Cola’s management was producing a trailing three-year return on equity or ROE of 42.88%, well above the targeted threshold and far outperforming the sector’s median ROE of 10.40%.
Stock buyback programs often elevate ROE. For example, Coca-Cola’s board of directors had authorized repurchases of up to $500 million in 2022.
At 14.02%, Coca-Cola’s three-year return on invested capital, or ROIC, is above the threshold and doubles the sector’s median ROIC of 6.18%, indicating that its senior executives are competitive capital allocators.
Coca-Cola’s ROIC also doubles its reasonable weighted average cost of capital or WACC of 6.75%. (Source of WACC: GuruFocus).
Coca-Cola’s management performance earns investor confidence from its positive revenue growth, double-digit net profit margin, and highly competitive returns on equity and invested capital.
QVI’s fundamentals rating for Coca-Cola: Bullish.
KO Returns on Management
Coca-Cola Co (KO) Revenue Growth: 6.98%
Coca-Cola Co (KO) Profit Margin: 23.45%
Coca-Cola Co (KO) Return on Equity: 42.88%
Coca-Cola Co (KO) Return on Invested Capital: 14.02%
Three-Year Trailing MedianKO Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, potential catalysts, and overall investment thesis of The Coca-Cola Company (KO). Let’s dig further after reading the required disclosures and disclaimers.
Disclosure: I/we have a beneficial long position through direct ownership of KO shares in our family portfolio. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Substack paid subscriptions). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Author
David J. Waldron is the founder and contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth With Common Stocks. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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