Special Report on Coke

By Vinayak on Tuesday, September 24, 2013 with 0 comments


Some things never change. The world doesn't stop loving the taste of Coca-Cola products and investors don't stop loving high dividend paying stocks. And if there is a company that is truly, the king of dividends it is The Coca-Cola Company (NYSE: KO). Coca-Cola's dividends seem to be never ending and have kept increasing at a nice rate for over a quarter century.

These dividends have ensured that value investors like the legendary Warren Buffet have been able to make impressive gains beating the market on many an occasion. But even with all its dividends and free cash flow, there is one thing about Coca-Cola that makes it a perennial favorite - it's internationally renowned brand.

Take a look at this nice info graphic that pays tribute to the wonderful brand that Coke is.

The Amazing World of Coke IMG

Coca-Cola has a wide moat and there doesn't seem to be any hint of it narrowing any time soon. Even its dividend payout ratio is only 51%, keeping shareholders confident that even more capital returns will be administered by Coca-Cola's investor-friendly management.

But as with anything, there are benefits and drawbacks to owning KO stock. The biggest drawback lies in Coca-Cola's flagship product itself. There were links established between soft-drink consumption and obesity. Even worse, drinking Coca-Cola's sparkling offerings could even lead to high blood pressure. Now there is the product killing report that heart disease and soft-drink consumption are somehow linked. 

But there is a way out and the reports are not as foolproof as they appear to be. Investors still see a lot of value in Coca-Cola and that is all that matters.

The fizz is here to stay

Reports and studies about how toxic sugar can be have threatened to make consumers stop liking Coca-Cola's carbonated offerings. The aspartame and high-fructose corn syrup that the trademark Cola is made with have come under close scrutiny resulting in a lot of consumers saying nay to Coke and yes to water, fruit juices and other healthy beverages.

It is not just consumers and health groups that have become concerned. Even state and local governments are placing restrictions on Coca-Cola's container sizes coupled with excise taxes. All this has led to a long-term downtrend in soft-drink consumption in the United States. It is interesting to note that per-capita consumption of carbonated drinks is at a 10-year low.

Coke has realized that it cannot grow sales in North America and developed markets that much. So it has headed to developing economies and also focused on noncarbonated drinks (Powerade, Minute Maid, Dasani) to calm the fears of consumers in the rich countries. But it won't be investment in emerging markets or even product diversification that will truly stop the headwinds. The real challenge will be the ability to innovate and find a sweetener that is both loved by health groups and health-conscious consumers.

I wouldn't put it past the grand old beverage company to come up with something like that either given its impressive financials.

Coke's financials

The financial metrics look good and the prodigious cash flow that KO generates doesn't hurt either. Binary option traders should continue watching this stock that is much loved by value investors with the Oracle of Omaha being its biggest fan.

Profit margins are pretty good for the consumer goods industry. In terms of certain leverage metrics, asset turnover is a weak area for Coca-Cola. But the soft-drink company makes up for it with its equity multiplier value. For the equity multiplier, it is the lower the better. And Coke has a much lower equity multiplier than the consumer goods industry and its main rival PepsiCo (NYSE: PEP).

The bottom line is that Coca-Cola is paying out a 2.9% dividend and there doesn't seem to be any reason that this will not keep increasing in the coming years. For this reason and several others, KO is worth buying a call on. Additionally, investors can make use of the technical tips we have and the fundamental ones to buy calls on shorter time frames whenever they see fit.

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Category: Stocks



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