Monday, June 22, 2015

Should I Buy KO?



Coca-Cola is one of the best known companies on earth as well as one of Buffets core long term holdings, so I could say good enough for Buffet it’s good enough for me, However, I like to make my own decision as nobody is perfect. To properly look at KO I will also need to look at PEP and DPS for a comparison and to see how KO is actually valued.


      1.      Price to Earnings Ratio.

Price To Earnings (TTM)
KO
PEP
DPS
25.5
22.1
20.8

Forward Price To Earnings
KO
PEP
DPS
18.8
19.3
17.9

Price to earnings on all three companies are very high these drink companies are on the expensive side when it comes to price to earnings even looking at Forward price to Earnings is expensive which is somewhat expected when looking at solid companies with good dividends. From the analysis DPS seems to be the best value bet however, we will look further.

      2.      Dividend Yield and Growth

Dividend Yield
KO
PEP
DPS
3.14%
2.81%
2.39%

 Next I took a look at the Dividend Yields. As KO has long been a favorite by Buffet as a dividend investment it yields a healthy 3.14% and has a long history of increasing that dividend. All three companies have good yields of over 2% with KO being the highest at with DPS being the lowest at 2.39%.

Dividend Growth Rate
KO
PEP
DPS
7.72%
6.77%
17.11%

 Another metric I like is dividend growth. A company may have a good looking dividend but I like companies that have histories of increasing this dividend so I looked at Dividend Growth. From this DPS has defiantly grown their dividend the most by almost 3x the other two. But all three show consistent increase in dividends.

     3.      Payout Ratio

Payout Ratio(TTM)
Company
KO
PEP
DPS
Ratio
77.3%
60.5%
47.2%

With good yields and good growth for all three companies the payout ratio needed to be looked at. This metric lets us know if the company can actually afford the dividend and also afford to increase it year over year. From the analysis however it shows the PEP and KO both payout ratios are very high at 81% and 94% respectively  DPS seems to have the best payout ratio at just under 60% the number I like to look for  on a growth basis. DPS keeps enough funds from their EPS to grow the company while PEP and KO are returning most of their profits to shareholders.
 
In conclusion I like companies with low P/E ratios compared to the market, yields >3% and, consistent dividend growth and a payout ratio of less than 60%. None of these companies off quite what I am looking for as an investor however, I will add DPS to my watchlist as it represent the best option in this group in my opinion.


I know Buffett love his Coca-Cola, but right now for me it’s just to expensive with the growth its capable of

 



5 comments:

  1. Very nice review - taking into account market competitors isn't often seen but this shows that perhaps KO is over extended with a 94% payout ratio. Would you happen to know what their respective Canadian/U.S. market share looks like Coca Cola vs Pepsi vs Snapple ?
    -Rich

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  2. I need to make some changes to this article as the payouts conflict with a few other sources I have checked! Bad data seems to be all over the web these days, That being said I believe the payout is still near the 80% mark which is very high every for a company such as KO. From a short search on this KO makes much of its money internationally while PEP makes most of its profits from within the US. Approx 80% of KO's profits are international while PEP is only around 40%. Also it can be noted the DPS only has 10% of its profit internationally. I much perfer the KO company to both the others based on their share in Monster energy and the Keurig brand, but I will need a pullback before I initiate a position there.

    Thanks for the View!

    Cheers,

    Pat

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    Replies
    1. Ahh I see thanks Pat. While visiting family in Europe last year I would say that Coca Cola far outweighs any other cola product or brand anywhere in Italy/Spain/Portugal and France. Like you if KO drops a bit in share price I'd be willing to pick it up at a discount.
      -Rich

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  3. Thanks for the review of the top three beverage makers. I fully agree with you that while KO might be an awesome Buffett stock and it is in my portfolio currently, it does look a little too expensive based on earnings. I'd like to see this one go well below $40 before considering a buy.

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  4. Agreed Keith,

    Like the company but Do not like the price tag! I would like to see Coca-Cola make a few acquisitions as well keurig and Monster would be huge and add to their moat of already great companies. But until that price drops the purchase just doesn't make sense.

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