Is Coke And Its 3.1% Dividend A Buy Before Earnings?
In the last few months, I’ve written two separate articles telling you to avoid investing in Coke stock – for now.
Today, I give an update and answer – Is Coke And Its 3.1% Dividend A Buy Before Earnings?
You can read the past articles in full using the links above.
But if you don’t want to; here’s a quick recap of the them before we get to today’s article.
If you could go back in time and invest in one stock it’d be hard to find a better stock to invest in than Coca Cola (KO).
The drink was invested in 1886 by Dr. John Pemberton as a remedy to drinking alcohol during the period’s temperance movement.
In 1888 Dr. Pemberton died and sold his remaining share of Coca-Cola to Asa G. Candler of Atlanta.
Soon after Mr. Candler bought back the remaining interests Dr. Pemberton sold off to various others to gain complete control of the company.
Six years after the first drink was created, the Coca Cola company was officially formed in 1892.
And then on September 5th, 1919 the company IPO’d on the stock market at $40 per share.
Since then its produced enormous returns for shareholders.
If you would have bought just one share for $40 when it IPO’d in 1919 and held until today that one share would have turned into 9,216 shares after the companies 11 stock splits.
And those shares would now be worth more than $400,000.
If you would have reinvested the dividends this entire time your original $40 purchase of one share would now be worth more than $10,000,000.
This is a 249,999X return on your initial $40 investment 101 years ago.
Or an increase of 24,999,900% in that time.
In other words, you spent $1 to make $249,999 back.
This kind of return – even over a long period of time like the 101 years since its IPO – its absurdly high.
To put this into context, if you’re able to invest your capital at a 10% rate of return every year, you’re doing great.
If you’d invested in Coke for the last 101 years, you’d have earned average annual returns of 2,475X per year. Or that your average yearly annual return would have been 247,500% per year…
Every year for the last 101 years if you reinvested the dividends.
This all originally started with selling one carbonated drink that was “excellent and refreshing” according to the first shop owner who tried it.
Coca Cola now offers various kinds of drinks like water, tea, and other carbonated drinks via 500 brands and 3,900 beverage choices.
And its products are now in almost every single country on Earth.
Is Coca Cola Profitable?
On an operating profit basis Coke’s produced an average operating profit margin of 23.7% per year every year over the last 10 years.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
Its margin is 2.37X this minimum threshold.
What about its FCF/Sales?
Over the last 10 years Coca Cola’s FCF/Sales is 17.8% on average every year.
This is fantastic.
I look for companies to produce FCF/Sales at higher than 5% on a consistent basis. Coke also crushes this number too.
Both operating profit and free cash flow are important because they help show you the true profitability of the company.
I estimate that far fewer than 5% of all public companies on Earth surpass my minimum thresholds for the 2 metrics above on a consistent basis… And Coke crushes them.
That puts it in the great operating company arena.
It well surpasses what I look for on a minimum profitability basis… But what about its valuation?
Is Coke Undervalued?
Right now, Coke is right on the edge of undervalued and fairly valued.
- Its current P/E is 19.9.
- Its current P/CF is 19.5.
- And its forward P/E is 24.3.
I look for companies to sell at ratios below 20 on these metrics to consider the investment undervalued.
These metrics show that Coke is right on the edge of undervalued and fairly valued.
Even though I expect Coke to continue producing great shareholder returns, profits, and cash flow going forward you should hold off on buying its stock today until you can get it at a cheaper price.
This thesis to avoid Coke until it’s cheaper continued playing out after it released its most up to date quarterly earnings on October 22nd, 2020.
- Unit volume fell 4% worldwide in the year-to-year quarterly period.
- Revenue fell 9% in the year-to-year quarterly period.
- Operating income fell 8% in the year-to-year quarterly period.
- And earnings per share fell 33% in the year-to-year quarterly period to $0.40 per share.
Because its profits fell due to the coronavirus while its share price rose its now even more overvalued than it was back in July when I first showed you Coke.
Its P/E is now 25.8.
Its current P/CF is 24.1.
And its forward P/E is 22.8.
I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…
Why below 20?
Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.
When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.
This means you have a better chance of earning higher returns owning its stock over time. And these things combined make it a less risky investment.
With Coke being overvalued it means there’s less margin of safety owning its stock. This means you have a lower chance of earning high investment returns owning it going forward. And these make it a riskier investment.
I’ll keep you updated on Coke in the coming months… But for now, continue being patient and wait to buy its stock until it’s cheaper.
So far this thesis to avoid Coke Stock has continued to play out… Sort of.
When I first told you about Coke back in mid-July its shares were selling at $226.66 per share. Now they’re selling at $266.79 per share as of this writing.
This is an increase of 17.7% in five months.
Which is great for its shareholders.
What’s not so great… This means its shares are even more overvalued now than they were back in the Summer.
- Its current P/E is 27.6.
- Its current P/CF is 25.8.
- And its forward P/E is 24.4.
This happens because if profits stay the same while share prices rise it increase the valuation of the company.
And its new profit and cash flow numbers haven’t come out yet because it releases its most up to date earnings in the coming weeks.
Unfortunately, you should continue avoiding Coke before earnings due to its overvaluation. This increases the risk and lowers the potential investment returns for you.
But I’ll keep an eye on it for you as its earnings approach and update you if it becomes a buy.
Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above