With S&P500 up by more than 5% year to date performance of KO, which is slightly negative doesn’t look like good. Keep in mind that KO is a typical defensive business, so risk of such investment is lower. Also when sentiment on the market is good then investors are selling defensive names and buying aggressive ones. This is the case of KO and it might be a good time to have a closer look on the company.

First let’s have a look on 2016:

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And please also have a look on sources of differences:

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As we can see EPS was lower, mainly due to divestures and currency. Well I prefer looking at reported EPS without normalization for currency. This currency change really happened so it is not a one-off etc. When you look on importers do you adjust margin for currency trends? No. So why should you adjust EPS in big corporations?

In 2016 company returned to shareholders $8.3b through dividends and buybacks. This is 4.4% return to shareholders, not bad, but there are many companies with higher return yield. Also keep in mind that operating cash flow was $8.8b, so truth to tell there is not so much space to increase payments to shareholders (assuming that there are no divestures/payments to shareholders are not debt-funded). On the other hand if we look on historical dividend yield it is not low anymore.

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Look, in 2009 yield was slightly above 4%, now is 3.6%. It means that in case of “big crisis” shares should drop by 15%, so not a lot…

How about earnings growth?

There is an official outlook from management:

Full Year 2017 EPS: Comparable EPS (non-GAAP) 1% to 4% decline versus $1.91 in 2016.

Let’s look on consensus:

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Well, if we assume that adjusted EPS16 is $1.91 then in 2017 there is a decline. Market discounts such events earlier (market is effective), so current share price include this decline. From 2018 there should be an increase In earnings + buybacks + dividends. Not bad.

Now if we look on valuation it is demanding.

P/E = 22

EV/EBITDA = 18

 

Summing up, it is not an easy decision whether it is a right time to buy Coca-Cola. From dividend yield perspective it is attractive, though multiple valuation is demanding (though company didn’t rally and relative valuation is lower) I think I will wait a little bit longer, maybe share price will be lower.

 

Disclaimer – KO no position