Coca-Cola Offers Growth and Protection

 | Jun 21, 2013 | 9:00 AM EDT
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After the market's robust gains this year and its recent choppiness, we're still looking to play offense. We are, however, trying to balance the portfolio with some stocks that are poised for gains over time, but which should be pretty defensive if the recent selloff continues.

Coca-Cola (KO) is one name that we like for such a scenario. The company came through the 2008/2009 recession relatively unscathed. Revenues and earnings did take a slight dip down during the worst of this tumultuous period, but the iconic franchise was never in trouble and quickly rebounded. Management continued to invest in core brand building and global expansion. To its great credit, KO exited the bad times a stronger organization than it was previously.

Sales have risen by 60% to $50 billion over the past five years. A good part of this dramatic increase grew out of Coke's acquisition of Coca-Cola Bottling. One-third of this increase, however, stemmed from continued organic growth. Earnings per share also rose by over 30% during this time period.

The core business is projected to show 5% to 6% top line growth, led by 3% to 4% unit volume growth and 1% to 2% in price increases. Volumes have been particularly strong for branded "Coca-Cola" drinks in the various emerging markets of Asia, Latin America, Eastern Europe and Africa.

China and India consistently report double-digit volume increases; other key countries such as Mexico, Brazil, Indonesia, Turkey and Russia have also been reporting robust volume trends. On top of strong volumes, pricing has also been healthy with 1% to 2% price increases each year.   

Due to the robust top line growth, KO has been able to leverage this strong top line growth into 7% to 9% annual earnings growth. The firm's consistent 1% to 2% share repurchase strategy has also contributed to earnings growth.

Besides strong operating fundamentals, the company's board of directors and its management team have been strong proponents of dividends and dividend growth. The current $1.12 dividend yields a strong 2.86% current yield. Dividends are projected to grow in line with earnings at 6% to 9% per year.

At its recent price of $39.13, KO is trading at 16.5x its 2014 estimated earnings of $2.37. KO shares have historically traded at 18x to 20x earnings due to its high level of earnings consistency and growth. We expect the stock to move higher into the growing earnings, aided by a modest multiple expansion. The continued dividend growth should also allow for stock price gains over time.

We fully expect these positive fundamentals to continue well into 2014 and 2015. KO also sports a comforting below-market beta ratio of .60. In light of the market's strong year-to-date gains and the likelihood of some choppiness ahead, peppering a portfolio with some more protective stocks makes sense.

While KO might not be one of the sexier names in a portfolio, its unmatched worldwide recognition and renown make it part of a very rarefied group of companies. The company should provide investors with a proper balance of both growth and stability over the upcoming years. Investors will also be rewarded with a healthy and growing dividend.

Coke truly offers the real thing for demanding, yet conservative investors.

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