Buy Coca-Cola after it Splits
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the eleventh time in its history, Coca-Cola (NYSE: KO) is again splitting its shares. This has not happened for the past 16 years. While stock splits are generally viewed as being bullish, the best way to look at such a transaction is from David Gardner of Motley Fool who wrote that, "Two of the best-performing stocks over the past 40 years are Wal-Mart and Berkshire Hathaway. One split numerous times, the other never has. Both are HUGE. It's about companies, not stock prices."
That is the reason to be bullish about Coca-Cola after its stock split: it is about the company!
Like Berkshire Hathaway and Wal-Mart (NYSE: WMT), Coca-Cola is a top performing stock. What makes the future so bullish for companies like Coca Cola, Wal-Mart, McDonald's (NYSE: MCD), Yum! Brands (NYSE: YUM) and PepsiCo (NYSE: PEP) is not that each is a well-managed consumer stock, but that all will profit from growth around the globe.
After moving into Myanmar, the former socialist Burma, Coca-Cola now does business in every state in the world except for Cuba and North Korea, selling more than 3,500 products in over 200 countries. PepsiCo also has operations in more than 200 countries and territories. The Golden Arches soar over the streets in 119 nations. Additionally, consumers can get their KFC in original recipe or extra crispy or their Pizza Hut pie with extra cheese in the 120 countries in which Yum! Brands operates.
In addition to its products increasing the market presence of the company around the world, sales growth and earnings-per-share growth are both expanding for Coca-Cola. In earnings just released, revenue for the second quarter topped expectations. On a quarterly basis, sales growth is up by 5.90%. Earnings-per-share growth has risen by 9.34% for the same period. For the next year, earnings-per-share growth for Coca-Cola is expected to improve to 9.61%.
Global sales volume is up by 4% for Coca-Cola. The strongest results were from the Eurasia and Africa with a 12% rise. Sales jumped 8% in the Pacific, 20% in India and 7% for China.
This sales growth and earnings-per-share growth produces a very healthy profit margin of 18.61% for Coca-Cola, far superior to that for other global consumer conglomerates. For PepsiCo, it is just 9.63%. Yum! Brands has a profit margin of 11.81%.
From such robust profits, Coca-Cola is able to grow its dividends. Due to its generous income component, Coca-Cola is a "dividend aristocract": a company that has increased its dividend for at least 25 years. McDonald's, PepsiCo and Wal-Mart are also dividend aristocrats. Coca-Cola now has a dividend yield of 2.63%, superior to the average for a member of the Standard & Poor's 500 Index of around 2%. Look for it to be raised...again and again!
Now trading around $77.50, the mean analyst target price for Coca-Cola over the next year of market action is $80.83. The mean analyst rating is bullish at 1.90, as 5 is the worst (strong sell) and 1 is the best (strong buy). Also bullish for Coca-Cola is the high level of institutional ownership at 63.84% and the extremely low short float of just 0.94%.
Coca-Cola, like Wal-Mart, is a Warren Buffett favorite, with about 200 million shares parked in the portfolio of Berkshire Hathaway. Buffett admires Coca-Cola due to the wide economic moat resulting from its global brand and market presence around the world, which protects the high profit margin. As Buffett once said about this for Coca-Cola, “If you gave me $100 Billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world’, I’d give it back to you and say it can’t be done."
This point was made too by Reese Witherspoon as Tracy Flick in the Alexander Payne movie "Election," where she pointed out to her teacher, Mathew Broderick as Mr. McAlister, who questioned her overzealous campaigning for class president, that even though Coca-Cola was the number one brand name in the world, it still spent more on advertising than any other company. Towards this end, Coca-Cola has the longest continuous sponsorship with the Olympics of any company, so the games this summer will elevate the brand name even more. That too will contribute to a higher share price in the future for Coca-Cola.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, McDonald's, and PepsiCo. Motley Fool newsletter services recommend McDonald's, PepsiCo, The Coca-Cola Company, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.