The Coca-Cola Co (KO)’s Growth Potential & Dividend Analysis by Ben Reynolds, Sure Dividend
Coca-Cola is the largest seller of non alcoholic beverages in the world.
Charlie Munger: Invert And Use “Disconfirming Evidence”
There’s no doubt Coca-Cola has generated tremendous growth since being founded in 1892.
Some investors think Coca-Cola’s growth days are over…
That is not the case.
Coca-Cola is benefiting from the growing global beverage industry more than any other company.
The worldwide beverage industry (excluding the US) is expected to increase in value by $300 billion from 2014 to2020.
Coca-Cola has 30% market share of the global beverage industry. If the company maintains its global market share up to 2020, it will add $90 billion to its market cap based on the expected increase in global beverage value.
KO had a market cap of ~$150 billion at the beginning of 2014. This gives the company an expected compound growth rate of 6.9% (not including dividends and share repurchases) up to 2020… If the company does not gain any market share.
I believe Coca-Cola will continue to gain market share and reward shareholders with share repurchases and dividends. This will drive up the company’s growth rate into the double-digits for the next several years.
Coca-Cola Well Positioned for International Growth
Coca-Cola has positioned itself very well to take advantage of growing non-alcoholic beverages worldwide.
The image below shows the company’s strong competitive position around the world.
As per capita income increases in Eurasia, Africa, and the rest of the developing world, Coca-Cola stands to gain.
Beverage Industry Growth & Rising Per Capita Income
Rising personal income throughout the world gives consumers more disposable income to purchase non-essential items like Coca-Cola.
Coca-Cola is enjoyed on a per capita basis much more in some countries than in others. This gives KO the opportunity to focus on countries with low levels of per capita consumption as the market is less saturated.
About 50% of teens and young adults have not enjoyed a Coca-Cola in the last 30 days. KO still has a long growth runway ahead.
Per-Capita Emerging Market Growth
Here are two facts that show Coca-Cola’s growth potential:
- Coca-Cola sells just 3.5% the amount of beverages in India as it does in the US on a per capita basis.
- China only consumes about 10% the amount of Coca-Cola products as a US citizen does on a per capita basis.
These 2 countries alone are each about 4 times the size of the United States.
Keep in mind, Coca-Cola is much more than just a soda company. The company currently has 20 brands with more than $1 billion in annual sales. Of these 20 brands, 14 are non-carbonated.
If KO can increase its per capita beverage consumption in these emerging markets, it will greatly expand revenues.
In both developed and emerging markets, consumption of still (non-carbonated) beverages are rising. The image below shows Coca-Cola’s per capita consumption by country:
Still Beverages Shine
International still beverage growth will drive Coca-Cola’s growth for the future.
The company has 14 still brands that do over $1 billion per year in sales. KO has grown still volume 5% over the last 12 months. This is on top of 8% international still volume growth in the previous year (fiscal 2014).
Source: Coca-Cola 2014 Back to School Conference Slide 6
The company has excelled in still beverages over the last several years. Coca-Cola has captured about 1/3 of global juice growth since launching its global juice center in 2007.
The company has a more than 2 to 1 lead on its nearest competitor in still beverages. KO is focused on expanding its tea portfolio.
The company’s Fuze Tea brand recently joined the $1 billion a year in sales brand club.
Source: Coca-Cola Back to School Conference Slide 18
Fuze is not the company’s only up and coming brand…
In addition to the company’s 20 $1 billion brands, Coca-Cola has around 20 up and coming brands that do between $500 million and $1 billion per year in sales. Of these brands, over half are still beverages. Coca-Cola is looking to partnerships with innovative companies to bolster its strong brand portfolio.
Coca-Cola is also expanding by partnering with businesses in key categories. The company partnered with Keurig to offer branded sparkling and still beverages on the company’s cold beverage dispenser.
In addition, Coca-Cola will release a hot Keurig Honest Tea product in the near future. The company’s partnership with Keurig opens up a new growth market for Coca-Cola.
Coca-Cola also partnered with Monster in a deal that transfers energy brands between the two companies and gives Monster access to Coca-Cola’s extensive distribution network. The move gives Coca-Cola a stake in Monster and its world class energy soda brand. KO has had limited success in the energy category, and the move is a capital efficient way for Coca-Cola to better position itself to gain from the quickly growing energy beverage industry.
Fundamental Ranking of Coca-Cola
KO has ranked as a Top 10 stock based on the 5 buy rules from the 8 Rules of Dividend Investing several times in the past 2 years.
The 8 Rules of Dividend Investing compare businesses with a long history of dividend growth to each other based on several quantitative rules that have historically improved long-term results.
Coca-Cola’s ranks relative to other high quality dividend stocks are shown below, along with why each rule is relevant.
Rule 1: Consecutive Years of Dividend Increases
Coca-Cola has increased its dividend payments for 54 consecutive years. This is one of the longest active streaks of any business. The company’s long dividend history shows it has the ability to grow profitably under a variety of economic, political, and competitive environments.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet
Rule 2: Dividend Yield
KO has a dividend yield of 3.1%, which is the 55th highest out of 182 businesses with 25+ years of dividend payments without a reduction. Coca-Cola’s relatively high dividend yield should appeal to income oriented investors.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
Rule 3: Payout Ratio
KO has a payout ratio of 71%, which is the 150th lowest out of 182 businesses with 25+ years of dividend payments without a reduction. The company’s relatively high payout ratio is safe due to the exceptional stability of Coca-Cola’s cash flows and the low levels of capital expenditures needed to operate Coca-Cola.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Rule 4: Long-Term Growth Rate
Coca-Cola has managed to grow earnings-per-share at about 9% a year over the last decade. The company has the 72nd highest growth rate out of 182 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
Rule 5: Long-Term Volatility
The company has a ten year price standard deviation of 18.6%, the 10th lowest out of 182 businesses with 25+ years of dividend payments without a reduction. Coca-Cola’s low volatility is due to its strong competitive advantage in a slow changing industry.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race
Coca-Cola is the gold standard in non-alcoholic beverage companies. KO has significant growth potential ahead in developing markets, especially India and China.
The company’s long dividend streak makes it a Dividend Aristocrat and a Dividend King.
As consumer preferences slowly shift from sparkling to still beverages, KO has positioned itself as the dominant still beverage company in the world.
Shareholders of Coca-Cola will likely be rewarded in the future with a double digit compound annual growth rate resulting from:
- Dividend yield of 3%
- Share repurchases
- Growing market share
- Tailwinds from growth in the overall beverage industry in the developing world.