For some time now I have been trying to find a potential substitute for Outotec but I haven’t been able to find one which would provide similar type of upside potential. The potential company could be Coca-Cola (NYSE:KO) which is a real dividend aristocrat. Let’s see how the company’s financials have evolved during the last 25 years. The source of the financial data was Minotaur. The revenue has grown from around $ 8 billion to $ 36 billion in 25 years and the revenue development has been quite stable.
Median annual revenue growth has been around 5% – although quite volatile.
Also shareholder’s equity has developed quite smoothly – or ~10% p.a since 1988.
The value of total assets has grown slightly faster than shareholder’s equity.
Shareholder’s equity divided by total assets has historically been around 40% but has now dropped to 34% due to the acquisition of North American unit of Bottler in 2010.
Current ratio has nevertheless stayed relatively the same since 1988 and hovered around 1. As Coca Cola’s business is very defensive and stable current ratio of 1 is justifiable.
The following graph demonstrates why Coca Cola is a dividend aristocrat: the company has been raising dividend per share since 1988 at an annual rate of 9.4%.
The dividend yield has however been around 0.8% and 3.3% which quite interestingly shows how irrational the markets expectations have been considering how stable Coca Cola’s business has historically been.
The graph below explains why the company has been able to increase it’s dividend for such a long period. The free cash flow has been steadily growing at an annual rate of 9.2% since 1988.
The graph below shows the FCF per share since 1988 which has grown a staggering 11.2% annually.
How profitable the Coca Cola has historically been? The below graph show the FCF to sales. Median value has been around 15% which is exceptionally high and clearly shows how fantastic the company really is. No wonder that Warren Buffet has invested in the company.
Return on Equity using FCF has as well been extremely stable and high. Median value has been a whopping 30%. This is something which most companies can never achieve even during boom years.
Also Return on Assets using FCF has been very high historically. However, after the major acquisition in 2010, it has dropped below 10%. Historical median has been around 13%.
How has the market valuation been historically? P/FCF was very high during the 90s and started to decline in the beginning of the millennium. During the last 10 years, the P/FCF has been around 23. Markets seemed for some strange reason value the company much higher in the 90s even though the profitability and growth has stayed pretty much the same.
P/B shows similar valuation behaviour as P/FCF.
Same thing for P/S.
On top of of being a very good dividend payer, the company has gradually and constantly bought back its own shares which have boosted the per shares value quite nicely. The number of shares has decreased around 1% annually since 1988.
How does the valuation look like? If we use the SPM method for calculating the value of the stock, the formula would be the following where E is the normalized earnings per share, G the estimated growth rate, D the normalized dividend and K the required return.
E, G and D should be quite “easy” to come up with. The hardest part will finding out a proper value for K. That is why I usually find out the K and not the P for the formula above so that I could find out what kind of required return the market is expecting from a company at the current price. If we assume that the normalized E would be 1.85$, normalized D 1.32$ and expected G 5%, the K would be ~6.4% at the current share price of 43$. If you think that 6.4% is enough for you, then you should invest in Coca Cola. For me it is not enough.