Recent Buy

I discussed my sale of shares in Intel Corporation (INTC) late last week, closing out my position with the company. I then revealed that I used most of the proceeds from that sale to initiate a position in Omega Healthcare Investors Inc. (OHI). However, I also let you readers know I took the rest of the cash from the sale of Intel and combined it with fresh capital from my day job to make one more purchase. And today I’ll be discussing that transaction.

Overall, I’m really excited about these recent moves. I feel like I let go of a company that has failed to live up to some promises and has not been very clear with its dividend policy, while adding a couple of companies in its wake that have been wonderful in rewarding shareholders with growing income. That’s a win-win!

I purchased 30 shares of The Coca-Cola Company (KO) on 1/24/13 for $38.98 per share.

The Coca-Cola Company needs no introduction. A global juggernaut in beverages, the company owns or licenses more than 500 nonalcoholic beverage brands. Their products are available in over 200 countries, and they own 16 billion-dollar brands. They are the world’s largest beverage company. They’re widely diversified across the globe, with Latin America representing 29% of volume, North America at 21%, Pacific accounts for 18% as does Eurasia & Africa, with Europe coming in last at 14%. The company sold 27.7 billion unit cases worldwide in 2012, up from 26.7 billion in 2011.

I’ll be honest and say I’ve been lukewarm on Coca-Cola over the last year or so. I haven’t been highly interested in adding shares to this company because of its perceived lack of value, while I instead focused on other companies that offered better value. However, it’s not always just about value. One also needs to keep a keen eye on quality, and I can think of no company that exudes quality more than Coca-Cola. My memory was refreshed on how important quality is when taking a hard look at Intel last week before I ultimately decided to sell it. A high quality company can face a few rough years and keep on ticking – growing the dividend, clearly communicating with shareholders on growth plans, and continuing to execute key strategies.

I’ve asked myself in the past if I could own only one company in my portfolio, what would it be? That answer turned out to be Coca-Cola, so it comes as a bit of a surprise that it’s a rather small position for me after four years of active investing. So I decided to partially rectify that situation after shares took a slight dip last week and add to my position with the company.

What I really love about Coca-Cola is how seriously they take their shareholders, and the relationships therein. For example, on their Investor Relations page they have a tab titled “Shareowner Information” where the company states: “Our mission is to create value for you, our shareowners, over the long term. We are pleased to have you as a shareowner and grateful for the confidence you have demonstrated by entrusting us with your investment.” And they’re not just talking the talk: the company returned $9.1 billion to shareholders through share buybacks and dividends in 2012 alone.

I love it when a company takes shareholders seriously, and communicates that appropriately. That gives me a lot of confidence investing in the business for the long haul.

Coca-Cola has experienced rather robust growth over the last decade. Revenue has a compound annual growth rate of 9.6%, up from $21 billion in 2003 to $48 billion in 2012. And earnings per share has a CAGR of 8.9% over this same time period, up from $0.89 to $1.97. Dividends have compounded at a rate of 9.8% over this same time frame. Seeing a trend? Coca-cola is about as consistent as it gets. ROE has been right around 30% over this time period as well, which is rather strong. Growth looks set to continue; S&P Capital IQ predicts an 8% CAGR in EPS over the next 3 years.

Coca-Cola’s financial position remains very strong. The debt/equity ratio is 0.4, with over $16 billion cash on the balance sheet. The interest coverage ratio, at 30, is solid. There’s really nothing to not like here.

And what about the dividend? Coca-Cola has been paying a quarterly dividend since 1920, and has managed to increase the dividend for the last 51 years. As stated above, the 10-year DGR stands at 9.8%. Overall, these are extremely impressive statistics. There are only a handful of companies with the kind of rich dividend history that Coca-Cola possesses.

One major aspect of Coca-Cola’s strategy right now is what they call the 2020 Vision. This is a specific and clear strategy for the 2010-2020 decade, whereby Coca-Cola plans to more than double its global servings per day over this time period to 3 billion. The vision focuses on six “P’s” – Profit, People, Portfolio, Partners, Planet and Productivity. Basically, Coca-Cola wants to not just be massively profitable, but be a great place to work and be environmentally responsible as well. I say kudos to that. Furthermore, setting specific and aggressive goals over a 10-year time frame is wonderful. It keeps the company and its employees focused on a mission and provides a clear target for which to measure success against.

I’ve been discussing the importance of competitive advantages a lot here lately, and how these advantages build an economic moat for a company. And when you’re looking for companies that possess what’s referred to as a “wide economic moat” in the financial industry it’s widely agreed that Coca-Cola is a model example of this. Huge brand name recognition, economies of scale, global distribution and a product that people are usually willing to pay a premium for because of quality.

There are some risks involved with investing in Coca-Cola. The company does face competition, chiefly from PepsiCo, Inc. (PEP). In addition, there is a trend in developed nations like the U.S. to avoid many of the sugary beverages that Coca-Cola markets and sells because of added calories. However, I feel that Coca-Cola’s market diversification across the globe, in addition to the product diversification within the company, helps reduce some of the potential headwinds the company faces in regards to backlash against some of their products. For instance, the company sells bottled water and a plethora of natural juices. In addition, the company is well positioned to make acquisitions that better match changing consumer tastes and trends over time.

After fully quantitatively and qualitatively analyzing Coca-Cola I feel totally comfortable increasing my position here. While shares in KO aren’t particularly cheap right now with a P/E ratio of 20, it’s a high quality company trading for a fair price. I valued shares using a Dividend Discount Model analysis with a 10% discount rate and a 7% long-term growth rate (well below Coca-Cola’s historical norm) I get a fair value on shares of $40. The margin of safety is probably minimal with shares in Coca-Cola at today’s prices, but with equity this high quality the margin of safety may not need to be as large as, say, a technology or pharmaceutical business that could face earnings drops in a cyclical valley. Furthermore, shares in KO don’t often yield 3% and with shares yielding 2.89% today we’re pretty close that that. Moreover, Coca-Cola is due for a dividend increase in February which will likely push it over that 3% yield mark which is generally a good time to acquire shares in this beverage giant.

This purchase adds $33.60 to my annual dividend total based on the current quarterly dividend payout of $0.28. With the addition of these shares, I now own 110 shares of The Coca-Cola Company.

My portfolio currently holds 43 positions. This is unchanged, as the purchase of KO shares was an addition to an existing investment. 

I’m going to include current analyst valuation opinions below, as I use these to concentrate my reasonable valuation estimate.

*Morningstar rates KO as a 4/5 star value, with a fair value estimate of $45.00.
*S&P Capital IQ rates KO as a 5/5 star Strong Buy with a fair value calculation of $34.20.

I’ll update my Freedom Fund in early February to reflect my recent addition.

Full Disclosure: Long OHI, KO, PEP

Do you like Coca-Cola at today’s price? Interested in buying? Think it’s fairly priced?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Comments

  1. Ben says

    While everyone else was being fearful, I chose to be greedy and I added 50 shares to my stake in KO today. Anytime you can get KO for around a 3% yield or under a P/E of 20, your making a solid choice.

    • says

      Ben,

      I agree. KO around 3% is usually solid. It doesn’t often breach that mark, so I feel good about this purchase. Glad to be on the same page as you regarding Coca-Cola. :)

      I wasn’t quite as greedy as you, but I wish I was. I’m just limited on capital and I’m trying to spread it around as much as I can.

      Best wishes.

    • says

      Investing Pursuits,

      Thanks! I think Coca-Cola should be just fine over the long haul The brand name is, of course, very valuable, but they have huge geographical diversification, economies of scale and product breadth. I think they’ll continue to reward shareholders handsomely.

      Best regards.

  2. says

    There are about 10 companies that everyone should have a substantial position in and KO is one of the top 3 IMO. Now all you need to do is cut your positions down to 30-35 companies and have 10k in KO, JNJ, PG, PM, XOM, CVX, PEP. It never hurts having monsters like these on your offensive line of your dividend team. Then transfer them to DRS at computershare. That way you can continue with Scottrade and still have diversity!

    • Anonymous says

      Hi Monty,

      I like that thought – sounds like a very good idea. Out of curiosity what are the other three ‘must haves’ – MCD might be one of them, I guess. I personally would add Nestle.

      Thanks for the reply & greetings from Europe,

      D

    • says

      Monty,

      I don’t believe in “diworsification”, but I also don’t believe in overly concentrating a portfolio. 30-35 companies is probably a good number, but I just seem to find more than 35 companies I’d like to invest in. I already have 43 and I haven’t even yet invested in GIS, CL, UL or NSRGY yet. I don’t know if I could cut it down to 35. I think 50 is probably “my number” At that point I’d feel my income is protected from one or two companies declaring dividend cuts. The other 48-49 companies could easily bridge the gap.

      Cheers!

    • gibor says

      I agree with DM on this…I also hold 40+ stocks spread out in 6 different registered accounts (plus several ETFs). For Canadian investors is more difficult to control the number as we want to hold the best players in both TSX and NYSE… good point about potential dividend cut…..

    • says

      gibor,

      Thanks for stopping by and adding that.

      Great job on the diversification. You’re in a wonderful spot. Should one company cut or suspend its dividend you’re in a great position to easily make up for the lost income.

      Best wishes.

  3. says

    KO looks pretty good at these levels. I am long PEP but contemplating starting position in KO. 3% initial yield is solid. This sell off to start the year has created some opportunities with a few stocks I follow.

    • says

      AA,

      I agree. The minor pullback has been very refreshing. PM in particular is attractive right now.

      I think KO looks great here. It’s a defensive holding that I can sleep well at night owning.

      Take care.

  4. says

    I’ve been contemplating adding some KO because like you mentioned you don’t get great value opportunities in companies this great. I can’t imagine you’ll be disappointed 10 years from now. Plus there should be a dividend increase announcement not too much longer from now.

    • says

      Pursuit,

      I think the me of 10 years from now will be happy that I invested in KO at today’s prices. I know the me of today is glad that the me of a few years ago invested in KO in the first place. :)

      I’m anxiously anticipating the dividend increase by KO. It won’t be huge, but it’ll be consistent.

      Best wishes.

    • Anonymous says

      people who bought KO in 1999 weren’t happy at all 10 year later, what makes you think you will be any different?

    • says

      Anonymous,

      From Feb. 1999 to Jan. 1999 KO was down -31.17% (-$9.67). The S&P 500 over that same time frame was down -35%. So Coca-Cola shareholders outperformed the S&P 500 over this period, and that was after drastically overpaying for equity in the company. I’d say people who bought in 1999 were probably pretty happy after all 10 years later. But thanks for trying.

      Overpaying for even the highest quality company is never intelligent investing, and I’ve discussed that numerous times.

      Best regards.

    • Anonymous says

      I for one do not compare myself to the spy, overall I’d be unhappy to lose 31% after 10 years. 10 years a very long time

    • says

      Pursuit,

      Great point. I didn’t even talk about the dividend growth, which was outstanding during this time frame. Of course, KO also started with a fairly low yield at the beginning there. I’m happy with 7% growth of the dividend over the long haul.

      Best wishes!

    • says

      Pursuit,

      Great point. I didn’t even talk about the dividend growth, which was outstanding during this time frame. Of course, KO also started with a fairly low yield at the beginning there. I’m happy with 7% growth of the dividend over the long haul.

      Best wishes!

    • says

      DW,

      Thanks for stopping by. I don’t think an investor can go wrong buying KO shares here assuming they have the available capital and room in the portfolio.

      Happy shopping. :)

      Best wishes!

  5. says

    Hi Jason

    I think KO is a great buy for dividend growth investing. Everyone looks at the PE ratio at 20 and thinks that’s high so I won’t buy, however a PE of 20means that your company is earning 5% on your investment, but they are keeping some of that to re-invest and earn even more. If the earnings keep growing at 9% then the share price should keep growing (unless there is a big sell off) thereby providing a growing income and a growing capital value.

    If you wait until they are available at a “more reasonable” PE of say 15, then you may be waiting forever to buy into this company, and missing out on the pretty reliable year upon year upon year upon year growth.

    When I start to be able to buy US shares, KO will almost certainly be the company I would buy.

    Well done on your buy.
    FI UK

    • says

      FI UK,

      KO doesn’t often sell at a P/E ratio of 15. If I remember correctly that was the approximate P/E ratio of the stock even at the depths of the Great Recession. The 5-year average P/E ratio is 18.2, and that’s probably a bit lower than usual because of the dip the stock had at the beginning of that range.

      Thanks for the support! Hope all is well across the pond. :)

      Cheers!

    • says

      moneycone,

      Thanks! I think the trade between INTC and KO/OHI will serve my portfolio well over the long haul. Intel could certainly turn things around, but I’m comforted by the knowledge that I could always buy back in later. And KO is definitely a buy-and-forget type of stock. It’s a no-brainer, in my opinion.

      Take care.

    • says

      w2r,

      Thanks. This is definitely a core stock. And that’s why I was disappointed that I didn’t have a larger allocation to Coca-Cola. I hope to continue adding to it as opportunities allow.

      Thanks for stopping by!

      Best regards.

    • says

      Pipeline,

      Thanks. PG is another stock that I have a rather small allocation to. I started to buy it in the low-$60s and just never got a chance to buy more. So many stocks, so little capital.

      I think KO should serve long-term shareholders pretty well. No telling what will happen to the stock price in the short-term, but I think the company will continue meeting its objectives and reward shareholders in the meanwhile.

      Cheers!

  6. says

    I’d love to buy some KO, but looking at their direct stock purchase plans on computershare, it has a fee for everything, and the fees are high as well.

    • says

      Squeezer,

      I wasn’t aware of that. That’s a bit of a disappointment, although it doesn’t actually affect me as I don’t use Computershare. However, I can see how some investors would shy away from KO under those terms.

      Hopefully they change at it at some point.

      Best wishes.

    • says

      Yeah I use computershare and other direct stock purchase plan transfer agents (Amstock, Wells Fargo Shareowner Online, etc) to purchase my stocks. When I buy a stock, its usually $25-100 at a time whenever I earn side money and put it into a stock. I think KO’s purchase fee is $2/purchase when I looked it up the other day, ontop of 3 cents per share. So I would lose $2 immediately plus a handful of pennies. I know it doesn’t sound like much, but when it takes 6 dividend payments or so to make that back, the fees hurt.

    • says

      Squeezer,

      Check out Loyal3. New on the block. It’s what I use to purchase my KO stock. No fees. The fees through computershares also made it a no go for me. Loyal3 also has PEP, UL, MCD to name a few.. Check it out if you get the chance.

  7. says

    To buy Coke is a good idea!
    3 percent dividend yield is ok for Coca Cola!
    PER 17,5 is ok, too!

    I wanted to buy HCP next week.
    But now i´m undecided…
    Coce or HCP… I don´t know…

    best regards
    D-S

  8. says

    Hi DM,
    First of all thank you for everything, Ive been following tour blog for almost a year now and im just starting to build my nest egg on my way to FFreedom. You’ve been a hero and an inspiration, investing, living frugally. I have a question, last december I bought 100 shares of KO for 40.14 per share then right now trading at 38-39. I bought ten high quality stocks that I think are good value right now like WMT, TGT, PM CVX, LEG, ATT and few more when their shares went down. Right now Im eyeing to add MCD, JNJ as decent value. My question is, how do you cope when your stocks are down like my latest addition cost me -3% and Ive been telling myself if I shouldve held on and just waited, I could’ve buy these shares cheaper than my cost. Also how do you average down? Im planning a DAC approach on my portfolio, how or when do you average down?
    Best of luck!
    -Christian

    • says

      Christian,

      Wow. Thanks for the kind words. I really do appreciate that! The thought of changing other people’s lives and providing inspiration is wonderful. I’m glad you’ve found some inspiration and value here.

      In regards to your question, for me it just comes natural. Try to keep an eye on the long haul. Maintain perspective. I average in on all of my purchases. Some will be higher than what I could have paid, other purchases will be well-timed. You can’t win them all, and you don’t really need to. In order to succeed and acheive financial independence early in life you don’t need to be a master stock picker. You instead need to learn how to live on much less and become a master saver. From there, focus on high quality companies and reinvest the dividends. Remember: 20 years from now it won’t matter if you paid $39 or $40.14 for KO when shares in Coca-Cola are 5 times that or more and you were reinvesting the dividends all the way along. It’s a marathon, not a race. :)

      As far as averaging down, I keep track of my entire portfolio and I’m routinely aware of when a stock is trading below my cost basis. I tend to think if I liked a stock at $X than I probably like it even more at less than $X, assuming the fundamentals remain strong.

      Try not to over-think it. Focus on your savings rate, and let compounding do the heavy lifting. Focusing on the day to day price swings will only deter you from keeping perspective and thinking about the long term.

      Hope this helps!

      Best wishes.

  9. Anonymous says

    I wish I could agree with your purchase of KO, but I can’t. I agree that in past years the enterprise was an excellent growth vehicle, but I am leery about the future. The products the company offers are all easily duplicated by other companies. It just takes a little finesse to offer a slightly changed formulas. The stock price is inflated at over 5 times book value. The P/E at 20 is a warning sign. The long-term debt is too high. I’m sorry to be so negative.

    • says

      Anonymous,

      No problem with not agreeing. That’s what makes it a market. Some people don’t like Coca-Cola, some people do.

      I have a more optimistic view on Coke over the long haul, but I could be wrong. That’s why I diversify. :)

      Cheers!

    • says

      Integrator,

      Yeah, I found that odd too. I think that has to do with the high qualitative ranking they gave it based on safety and quality. Their DCF fair values don’t always relate to how many stars they assign a security. I think that’s cool because they’re separating out the quantitative and qualitative analysis.

      Thanks for stopping by!

      Best wishes.

    • says

      I picture KO being around 30, 40, even 50 or more years from now. Only time will tell but it’s hard to imagine a world without Coca Cola. It is one of the most reliable stocks on the planet in my opinion.

      Long KO.

    • says

      Dividend Guy,

      I agree. It’s tough to imagine a world without a behemoth like Coca-Cola. Even if there is an exodus away from sugary beverages worldwide you still have juices, water, sports drinks, etc. However, I think eventually KO and PEP will figure out how to sweeten the sodas with much less (or no) calories and make them still taste just as good. We’ll get there.

      Cheers!

  10. says

    Congrats on the recent addition. You could’ve just put “Recent Buy: Coca Cola”. This is a company that truly needs no introduction. I was also looking at KO but decided that the company was trading a little bit above its average P/E ratio. I guess I am just waiting for shares of KO to pullback a little further but at a 2.89% yield for KO, its not that bad.
    In other news I took your advice and changed the template for my blog. Check it out and tell me your thoughts. I just want to make sure my readers are able to understand everything on the blog. In addition to this I also wrote my first “buy” article.

    Continue the great work DM.

    Dividend Prodigy

    • says

      For some reason instead of viewing the blog in classic mode, you have to view it in side bar mode. I am trying to fix the problem right now. You can change to mode in the upper left hand corner

      Dividend Prodigy

    • says

      Prodigy,

      Haha. You’re right. I probably could have just said: “Recent Buy: Coca-Cola. ‘Nuff said.”

      I checked out the blog again. I don’t know if it’s just me, but I have difficulty with that template/layout. I would consider switching it altogether to something else. I know blogger offers a few options. I think Awesome Inc or Simple layouts would offer a better look. That’s just my opinion. Your mileage may vary.

      It’s cool you have your portfolio up. You’re off to a great start for your age. Keep it up and you’ll be very wealthy when you’re my age. You’ll blow my progress out of the water.

      Best regards.

  11. Spoonman says

    KO is as solid as they get. I’ve been buying when it dips below $40. I am well allocated in KO so it’s not a good idea for me to buy that many more shares.

  12. says

    I also bought KO on Jan 24 at $39.02… Was holding PEP for several years and finally initiated position in KO. Hope nice dividend increase in Feb

  13. Anonymous says

    hi, this is the first time i comment here, been following you since last november. Anyway, i think you did the right move regarding KO and INTC. Intel is a powerhouse in PC market, but with the rise from mobile market, its definitely hurt the revenue. In contrary, its almost impossible to bypass Coca Cola moat, world wide recognized brand, spread over 200 countrys, you simply cant go wrong there

    Keep us up to date

    ,Cong

    • says

      Cong,

      Thanks for stopping by and commenting for the first time. I hope you stay in touch!

      Thanks for the support. I’m glad you think I made the right choice.

      Intel may yet turn it around in mobile, but I just have less fears regarding Coca-Cola’s ability to compete and be viable. Intel has a lot of questions, in my opinion, and Coke offers answers. I prefer the latter!

      Take care.

  14. says

    Hi DM,
    First I would like to thank you for asking about my rental, I have a small post on that in my blog, I have done all the work and put the house on sale. The house is on market for 20 days, due to weather and timing of the year i am thinking it will take time to sell the house. Also I did a recent purchase of TGT. Good purchase on KO, I would also like to increase my position in KO.
    DM

    • says

      Dividend Mom,

      Hey, glad to hear things are turning around with the rental. Good luck with the sale!

      I’ll be honest with you. I have no desire whatsoever to get into the rental game. There are just too many potential headaches. To me, one of the best things about dividend growth investing is that everyone does the work for me. I just sit back and collect the (rising) income.

      Great purchase there on TGT. You likely got in way cheaper than I did. TGT is still high on my watch list for a potential purchase in February. I don’t want to get crazy with it, but I think I could add another 20 shares or so.

      Best wishes!

  15. Anonymous says

    I added 92 shares @37.52. Love to see us both increasing our stakes around the same time.

    Coke is now my third largest position and it could well go to the top spot in 2014. Especially, since it’s share seems to lull at sub 40 dollar prices. I feel quite comfortable adding KO for the long haul at these prices. As the market is a bit too frothy for my tastes, flight to quality seems appropriate. And no other company screams quality louder than KO!

    Good post!

    Regards

    Jarmo

    • says

      Jarmo,

      Nice buy there! Very sizable commitment. And you’re right, KO is about as high quality as it gets. They’ve got great products with fantastic brands and they sell them all over the world. The product breadth and geographical diversification here is fantastic.

      I hope KO stays cheap here for a little while. It’s high on my list for a purchase in February, capital permitting. I see a few stocks that are looking decent here, so we’ll see how much cash I have to play with this month. It’s fun to go stock shopping! :)

      Cheers.

    • says

      Hari,

      I checked out your analysis. Very interesting stuff there, and definitely a different take than what I usually see! And I would agree with you that while it’s generally not a cheap stock right now, the quality makes it a worthy purchase.

      Cheers.

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