Somewhat contrary to its fiercely competitive advertising strategy and iconic brand-promotion campaigns, the world’s largest beverage company could easily be dubbed one of the most unexciting equities to own. Coca-Cola (KO - Free Coca-Cola Stock Report) definitely epitomizes the safe blue-chip play, offering all of the characteristics an investor expects from a highly conservative vehicle. In fact, it is fair to say that these shares are about as risk-averse as one can get in the equity markets. There are several factors that support this theory. Beginning with the Ratings box in the lower right hand corner of the page, KO’s marks for Price Stability and Earnings Predictability are exemplary at 100 (Highest), respectively. Furthermore, the Financial Strength rating offers further testimony to the company’s top-notch balance sheet and superlative financial flexibility. Indeed, with $16 billion in cash reserves and only about $14.2 billion in debt, it is reasonable to say that its coffers are flush. It is no wonder that the stock is ranked 1 (Highest) for Safety (this can be found in the Rankings box at the top left corner of the page). Certainly, there is nothing wrong with cautious investments, especially one that has consistently offered a healthy, growing dividend. Indeed, shifting down to the Statistical Array reveals that the company has been increasing its shareholder income distributions annually as far back as 1997. All told, the page helps to illustrate KO’s considerable merits as a solid income generating, highly conservative investment option.
On the other hand, however, the more challenging question is whether or not these shares have any worthwhile growth appeal. A look at the graph line suggests that KO stock has been a consistently steady climber over the past several years. The stock’s historical 5-year total return has been just below 80%, while the 10-year figure is well above 100% (not displayed on the page). Moreover, the stock has more than doubled from its late-recession low of $18.70 a share. Some may argue that this stock has been a bit of a “dud” over the past 15 years, when compared to the equity’s performance in the ‘80s. Still, we believe that these are fairly attractive returns, as the equity has outpaced the Dow Index, as well as the S&P 500, and especially considering the stock’s safety characteristics. Notably, investment icon Warren Buffet is one of Coca-Cola’s biggest supporters. The stock is one of Buffet’s largest positions at Berkshire Hathaway (BRK/B). But what of the issue’s prospects over the next five to ten years?
Value Line’s projections do not extend as far out as ten years, but a look at the company’s estimates on the far right of the Statistical Array and comparing them to the figures in the Annual Rates box sheds light on the company’s operational performance outlook over the next 3 to 5 years. It is worthy of note that although sales, earnings, cash flow, and dividend growth is expected to remain solid in the high-single digits range, a slowdown in these rates is expected to occur. Nonetheless, KO has recently been flirting with its all-time high of $44.47 (split adjusted) achieved back in mid-1998. Moreover, glancing at the Target Price Range in the Graph and the Projections box, we see that the stock offers above-average price appreciation potential and decent total return prospects three to five years out. Additionally, in the Analyst Commentary, analyst Robert Greene notes that although the issue is best suited for conservative investors, recent price pullback “may intrigue long-term investors seeking to establish positions at a reasonable valuation.” Furthermore, Mr. Greene states that “Overall, emerging markets continue to provide the most fertile growth opportunities.” We believe this international market-share expansion may well prove to be a catalyst for this stock over the long haul, particularly when global economic conditions regain sustainable positive momentum.
All told, while these shares do not stand out as an exciting growth instrument. Still, we do believe that KO has a bit of “fizz” left. Investors should note, however, that the stock is ranked 4 (Below Average) for Timeliness, which suggests that it may lag the broader market in year-ahead price performance. Still, we recommend monitoring these high quality income-yielding shares closely for a good entry point. The stock is currently trading at just above 18x 12-month earnings (through March of 2014), which is below our projected average annual market P/E out to late decade.
At the time that this article was written the author held no positions in any of the companies mentioned.