Coca-Cola Is A High-Yield Laggard
The Coca-Cola Company (NYSE:KO) has been lagging its largest competitor Pepsico (NASDAQ:PEP) all year and it’s no wonder. Where Coca-Cola is a beverage-pureplay with a big focus on away-from-home consumption Pepsico has been working hard to become a diversified consumer staples company.
But that doesn’t mean the Coca-Cola Company isn’t a buy. In fact, with investors wondering where to put their money lower-valued, blue-chip dividend payers are becoming more and more attractive. And the Coca-Cola Company is still a dividend-paying powerhouse.
"Throughout this year's crisis, our system has remained focused on its beverages for life strategy. We are accelerating our transformation that was already underway, shaping our company to recover faster than the broader economic recovery," said James Quincey, chairman and CEO of The Coca-Cola Company. "While many challenges still lie ahead, our progress in the quarter gives me confidence we are on the right path."
Coca-Cola Beats Consensus With Improving Trends
The Coca-Cola Company reports that trends are improving on a month-to-month basis but the away-from-home channel is still hurting. Net revenue came in at $8.7 billion or down 8.4% from the previous year but 400 basis points ahead of the consensus.
Organic revenue fell 6% versus the 8.5% projected by the analysts due to the combination of volume and price mix. The company’s margins improved on an adjusted basis, up more than 200 basis points from last year and 300 basis points above consensus.
Moving down to the bottom line, Coca-Cola’s operating income shrank -8.0% from the last year but delivered better than expected earnings. The GAAP earnings fell short of consensus by $0.06 but adjusted EPS beat by $0.09. The company failed to give any guidance for the year but the outlook is at least stable.
The analysts are expecting revenue and earnings to contract slightly with the season but even so, the outlook for Q4 is more than enough for the company to beat the consensus for FY2020. Looking forward, the analysts are expecting Coke’s rebound to continue into 2021 with revenue and EPS growth in the range of 10% to 15%.
As for the transformation, the company will continue to pursue its beverages for life ambition by repositioning the portfolio with brands that have the strongest potential to grow their consumer bases, increase the frequency of use and drive company margins.
Coke expects to offer a portfolio of approximately 200 master brands or a 50% reduction from the current number.
Coca-Cola Is A King Of Dividend Growers
The Coca-Cola Company is running a 90% payout ratio on its 3.28% yield which suggests a dividend cut may be in order. The mitigating factors are that this company is a Dividend King with 58 years of annual increases, the payout ratio isn’t as bad as it looks, and the balance sheet is in good shape.
Regarding the payout ratio, the ratio is close to 85% based on my outlook for FY2020 earnings and gets better in the following year. As for the balance sheet, the company is carrying some debt but it is mostly long-term and offset by a large cash position and a decent coverage ratio. In terms of cash, Coke is sitting on more than $4.62 per share or enough to cover the payment with increases for more than 2 years.
Coca-Cola May Be Ready To Move Higher
The 3Q earnings report has shares of Coke moving higher in early trading but there is some resistance. Resistance is at the $51.25 level but it may not last long. This level has been tested several times before, price action is forming a bullish triangle, and the indicators suggest higher prices are on the way. A move above resistance would be a trigger to buy with a potential 20% to 30% upside over the next two to three months.
And that’s on top of the yield.
