Coca Cola is a business that I’ve always respected and admired and with good reason. The business has an exceptionally wide moat as a result of its intellectual property and marketing and distribution prowess.
Its been selling beverages since the early 1900’s and has had a successful track record in growing revenues and earnings for much of the last century.
For a dividend investor, Coca Cola has proven a real treat. It has a record of successfully increasing dividends over the last 50 years. This unbroken streak of dividend increases hasn’t gone unnoticed by investors.
Warren Buffett is a particularly big holder of Coca Cola stock. In fact, its Buffett and Berkshire’s second largest investment. Buffett owns 400M shares in Coca Cola, his second largest investment after his stake in Well Fargo.
Long term investors in Coca Cola have been handsomely rewarded over the years. An investor who invested $10,000 in the S&P 500 basket of stocks in 1970 would have almost $190,000 today. Certainly not a bad return.
An investor in The Coca-Cola Company who invested $10,000 about 50 years ago would have had a stock value of almost $500,000. If you think that’s impressive, consider the scenario where those dividend were reinvested.
That same investor would have almost $1.75M in an investment in The Coca-Cola company. Not only does this illustrate the strength of the Coca Cola business, but also the power of dividend reinvestment which can really be seen over a very long time period.
I’ve previously mentioned that not all dividends are created equally and there are inherent variability of earnings in certain types of companies such as resource companies. In my view, Coca Cola is at the opposite end of the spectrum as far as earnings quality and stability.
Just look at Coca Cola’s revenue growth over the last 10 years. In all but 1 of those years, what is observable is a nice upward trending revenue profile that progressively increases over time.
This company is solid, dependable and bankable. And for a dividend investor, that’s gold.
My history with Coca Cola goes back to 2008. I bought Coca Cola from October 2008 through to April 2009, at roughly the same price its trading at today (the stock split recently, which means its effectively doubled in price since then!).
I bought close to $6000 worth of stock in the $40 range, which I sold in mid 2010 for a 20% profit. The sale was one of the biggest mistakes I have made. Had I held on, I’d be sitting on $12,000 worth of Coca Cola stock paying out ~$360 in dividends today. Alas not to be .
I have been taking a close look at Coca Cola stock again recently and have decided to accumulate a position. I purchased $5000 worth of Coca Cola stock at the end of last week @ $40. That represents roughly half of the total position I’d like to hold, and I will look to add another $5000 if Coca Cola falls to $36.
The question is, how does this purchase compare with my previous accumulation of Coca Cola and was this a reasonable buy?
At the time I picked up Coca Cola in 2009, it was offering close to $1.64 in dividends/ share, and providing close to a 4% yield.
My most recent purchase of Coca Cola was decidedly less profitable for me in terms of yield. I estimate close to $1.18 in dividends over the coming year, or just under a 3% yield. Not bad, but definitely not as good as 2009.
From a valuation perspective, Morningstar’s historical data suggests Coca Cola was trading on a PE of 18 in 2008.
Coca Cola’s trailing PE is 21 today, or 17 on 2014 earnings. Again, on a valuation basis its not as cheap as where I bought in 2009.
So why did I buy?
I place a great deal of respect on Morningstar’s valuation. Morningstar currently has a valuation of $45 on Coca Cola stock, which implies that the stock is trading at a 10% discount to fair value. S&P, who I also respect, has a $48 fair valuation on the stock.
While Coca Cola may not be trading at a hugely compelling discount to fair value at present, I’m at least confident that I am buying at or below fair value. It represents quality at a reasonable price. For a business with a stable earnings profile, that is plenty fine for me.
I expect my purchase of Coca Cola to yield an annualized total return of 10-11% over the medium term. That will be comprised of an initial dividend yield of 3%, and dividend growth between 7-8%. To collect a 10% return with what I view as pretty limited risk is right in my sweet spot.
I have been investing in dividend stocks for a long time now and I place significant value on stability of earnings. Along with McDonalds, I place Coca Cola in the upper echelon of stocks with high quality earnings.
Strong earnings quality is particularly important for me given I have a number of mid cap dividend payers who may have more variable dividends. Having strong dividend aristocrats at the core will help smooth volatility as these smaller dividend players grow.
Ultimately, I expect that when I look back in 40 years time at my Coca Cola holding the stock will be trading at multiples of my purchase price. I doubt I will quibble that I could have bought the stock for several dollars cheaper.
There are a number of dividend stocks offering better yields at that moment for which I’m not sure I’d be able to say the same thing in 40 years.