The Dow Jones Industrial Average crossed back over the 14,000 point mark today, a level it’s been hovering just under or just over for the last couple of weeks. It’s no secret the stock market has been like a rocket ship since the beginning of the year. As such, us value investors that focus on dividend growth stocks trading at attractive long-term prices relative to their intrinsic value face an uphill battle. What I’ve been focusing on over the last few weeks is buying quality on dips, as you can see here and here.
In a market that’s as strong as this one, I like to increase my ownership stake in high quality businesses (even if they’re trading for a fair price) that have durable economic moats. This affords a certain level of comfort in case the market starts to decline precipitously. High quality dividend growth stocks tend to do well in falling markets due to their defensive nature and investors history of fleeing to safety in the face of volatility. As such, I recently increased my ownership stake in one of the highest quality companies in the world.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 40 shares of The Coca-Cola Company (KO) on 2/12/13 for $37.64 per share. When I think of high quality, there are few companies that come to mind as quickly as Coca-Cola. This is a company that was one of my earliest purchases, as my first purchase was back in July of 2010 for a split-adjusted cost basis of $26.56 per share. Obviously KO has had quite a run since then! I’ve been meaning to increase my ownership stake on many occasions, but always ended up finding other equities in which to allocate my capital. This purchase doubled my position with KO, and I’m very happy to have a larger stake in the largest beverage company in the world.
I decided to add to my position today as it was down considerably (down 3% at one point) due to missing analysts estimates for Q4 earnings and revenue. Q4 EPS came in at $0.41 per share, compared to $0.36 per share a year earlier. This missed analysts estimates of $0.44 per share. I love overzealous analyst estimates and the opportunities they provide! Profit and revenue up, stock down. Lovely.
The fundamentals of this company are simply fantastic. The balance sheet is solid, with a debt/equity ratio of 0.5, the EPS CAGR over the last 4 years has been 9.4% and the 4-year revenue growth rate has been a very strong 12.7%, compounded annually. This company is a true dividend champion, as it’s one of the few companies that has raised its dividend for 50 years straight. The 10-year dividend growth rate is 9.8%. The current P/E stands just under 20, so this stock is fairly valued as I’ll discuss below.
With little debt and fairly strong growth, backed by one of the strongest brands in the world (Coca-Cola) I feel this is a long-term winner, and one of the strongest companies a dividend growth investor can possibly invest in. Did I mention this company has 15 $1 billion brands? Huge economies of scale, a global supply chain and operations in more than 200 countries build a pretty strong economic moat around this castle of a business.
This purchase added $40.80 to my annual dividend total based on the $0.225 per share quarterly dividend. The great thing is that KO usually increases its dividend in time for the March payout, so I anticipate a higher dividend payout shortly. My entry yield on this purchase is 2.7%.
This stock is trading for a fair price. I performed a Dividend Discount Model using a 7% long-term dividend growth rate (conservatively below it’s 5-year DGR and 10-year DGR) and used a 10% discount rate (appropriate, especially for the quality) and got a Fair Value of $36.38. This is slightly below where I purchased at, so again it’s trading for a fair price. I didn’t purchase these shares because they’re a steal in an expensive market, but rather because my allocation to this extremely high quality company was low and I wanted to increase the defensive nature of my portfolio in the face of a rising market.
I don’t know if I’m going to make any more purchases for the rest of the month. With earnings season upon us this may allow further opportunities, but as of right now I plan to sit tight with the capital I have.
With this purchase I still have 28 positions in my portfolio.
Some current analyst opinions on my recent purchase:
*Morningstar rates KO as a 3/5 star valuation with a FV estimate of $38.00.
*S&P rates KO as a 5/5 star Strong Buy with a FV calculation of $34.20.
I’ll update my Freedom Fund in early March to reflect my recent addition.
Full Disclosure: Long KO
What are you buying?
Thanks for reading.
Photo Credit: Stuart Miles/FreeDigitalPhotos.net
Good Buy! Yesterday I bought 100 shares of $KO. I sold $NYX shares to finance the transaction. Buy on weakness.
KO is a great stock. It was one of my first dividend growth stocks.
I love how one quarterly earnings miss causes the market to spaz out and sell off. That’s a great way to pick up good companies in an otherwise overvalued market.
Buying quality companies at reasonable prices is a winning formula. That said, I’ve been eyeing Dr. Pepper Snapple (DPS) for a year or so now. Seems a bit cheaper than KO and way cheaper than PEP. 12 $1B brands is amazing for KO!
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Coca Cola is definately one of my top favorite dividend growth stocks. I’d like to add to my position as well but alas will have to wait until I have more cash available for investing. Still lots of room for growth with this company as well as they move more into international markets and get them hooked on the sugary soda delight that Americans over indulge in!
I’ve been trying to be disciplined and not buy in this rather overheated market, but yesterday I finally caved and purchased AFL, in time for the dividend. by a stroke of dumb luck, I originally bought it at $39 last year. then spent the rest of the year waiting for it to go down to buy some more shares–which it never did. so I made a commitment that once it got down to the 40s, I’d spring for a few more shares. I only bought 30 shares, so if the market goes down more, then I’m happy to scoop up more AFL.
Tom Roberts,
I’m glad to have you as a fellow buyer in this high quality company. Not a steal at today’s prices, but I believe risk adjusted returns should be fairly solid. I’m looking forward to the upcoming dividend raise.
Best wishes!
Journey,
I agree. Missing analyst expectations is a great way to pick up shares in high quality companies on dips. Having a long-term time horizon is the best way to counteract the market’s seemingly endless nonsensical actions.
Best regards!
Headed Home,
If you liked DPS yesterday, you should love them today. They dipped almost 6%. Sounds like it’s time to jump in if you’re a believer in this name. 🙂
Actually KO has 15 $1 billion brands. It’s simply amazing. I think the exposure to emerging markets, and especially its concentration in China, will serve the company well over the long run.
Take care!
Dan Mac,
Haha. Yeah, us Americans love to over indulge in sugary soda delight! Me included. I would say one of my few dietary/budgetary indulgences is my consistent soda (pop as I call it) intake. I drink 1-2 cans per day during the week and slightly more on the weekend. Yikes!
I guess it’s great to be a consumer contributing to my shareholder side.
Best wishes.
kolpin,
Nice buy on AFL. I also recently added to my position. My first purchases were at extremely depressed levels, but I still feel there’s a lot of value in shares right now. If it goes down further that’s just a better opportunity! 🙂
Best regards.
Quin,
I’ll be watching PEP’s report as well. I’m already pretty fully allocated to PEP, so unless it drops significantly I’ll continue to hold fast.
From my research it seems PEP concentrates more on Russia and India, while KO eyes Asia. We’ll see how it all turns out!
Best wishes!
Mark,
Thanks for stopping by!
Yeah, you can’t go wrong with KO long-term. It’s such an easy pick I feel bad for even writing about it. It’s snooze fest companies like this that make shareholders rich over time.
Best wishes!
Great buy on the pullback. I sold a KO put yesterday after the drop in price. If the price stays at this level I plan to open a small position next week to compliment my PEP holding.
AAI,
Thanks for the support!
I like both PEP and KO. I view them as different, but wonderful, companies. PEP has been a bit disappointing lately, but I feel that the moves Nooyi has made regarding healthier snack options will pay off in the long run. We’ll see.
Best regards.
Awesome move. I recently purchased KO (mid-January) as the market started heating up. Same reasons as the ones you mentioned above. I don’t mind paying fair value for quality like Coke!
Warrior,
Great move yourself. Buying KO is almost always a great move as long as it’s not severely overvalued. I’m with you – I’m okay with paying fair value for this type of quality. It may not be growing anymore here in the U.S., but the potential abroad is huge.
Best wishes!
I plan to buy KO too. PEP’s quarterly earnings report come out soon. It’ll be interest to see how Pepsi performance in China market and Europe market, where are the key areas that caused KO missed analysts’ estimates.
Nice call Mantra!
Mark
Buffet just bought half of Heinz Company, another high quality dividend growth company that i knew i should have bought a few months ago.
Haha. Yeah, I took a nibble of DPS yesterday (25 shares). I’ll probably buy another 25-50 now that the bleeding seems to have stopped. I need to start filling in my portfolio rather than buying new names.
FYC,
Thanks for stopping by.
Yeah, gotta love ol’ WB. He’s just as smart and wily as ever.
I looked at HNZ on a few occasions and always passed for some reason or another. I’m kicking myself now! 🙂
Best regards.
KO is one of the greatest dividend growth stocks I can think of. Pretty sure you’ll be happy with this one 20 years from now. I nibbled on KO a few months ago, we’re on the same page here!
CI,
KO is definitely one of the best dividend growth stocks available. The premium it typically trades at is one of the only things I dislike about it. However, the fact remains that I want to be a part-owner of this company and the larger that stake, the better. I love this company.
We’re definitely on the same page! 🙂
Take care.