The following stock valuation is about Coca Cola (KO). a company which has an impressive dividend history and is one of the consumer giants out there. But it is also a company which is struggling when it comes to growth in the last years. Nevertheless I still think it should be one of the core holdings of any dividend portfolio. Recently KO announced a dividend increase of 5.7% to new yearly dividend of 1.48 USD. But let’s have a look at the valuation and if it is already in my buying zone.

The Coca-Cola Company is the world’s largest beverage company. The company has more than 500 beverage products on the market including soft drinks, waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. The company was founded in 1919 and is based in Atlanta, GA. Coca-Cola is largely affected by health trends, as obesity and other health concerns reduce demand for some of Coca-Cola’s products. KO has increased its dividend since 1963.

Valuation

Currently KO is priced  at 41.72 USD per share.

If I take the weighted average of the 4 ratios according to the 5  year average the price would be at 36.7 USD. That means the current price is 13.8% above its 5 year average. The 5 year high was at 46.87 USD about 6 months ago, so currently the stock trades 11.0% below its 5-year high.

The fair market value ratio of beverage-soft drinks (consumer defensive), according to Morningstar, is currently at 1.06. If I divide the current price by it I will get a price of 39.36 USD.

Earnings per share growth

In 2011 the EPS were at 1.85 USD and EPS in 2016 were at 1.49 USD. This just means there was no growth in the last 5 years at all. Actually EPS decreased on average by around 4% per year.

Dividend History and Future

KO has an impressive dividend history, increasing the dividend for 54 years in a row. In the last 5 years, the average growth per year is 7.98% based on a dividend of 0.94 USD in 2011 and a current full year one of 1.38 USD. The payout ratio with 92.6% is already very high and if there will be no growth coming up in the future it will be a problem.

An important point for my buying decision as well is the dividend yield on cost, which is currently at 3.55% based on the new quarterly dividend of 1.48 USD. After tax, my minimum yield I want to reach within the next 3 years should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming a dividend growth of 5% per year the dividend in 2020 will be at 1.71 USD, which means a yield on costs of 4.11% before tax. From this point of view it should be a buy but the payout ratio is a point that concerns me. But at the same time the dividend is still covered with free cashflow.

Conclusion

In general Coca-Cola does not look that attractive right now, but I am convinced that KO will make it through this difficult period of no growth and will remain one of the few dividend paying machines. I also still think that especially considering the strong brand of Coca-Cola and the strong fundamentals it is never a mistake to have it in the portfolio.

But would I buy it at the current price? No I wouldn’t, the yield is very attractive but currently the stock is overvalued. My entry point for KO will be at a price of around 38.00 USD, so I am hoping for further drop of 9%.

What do you think about KO? Do you already have it in your portfolio or would you buy it at its current price?