The Coca-Cola Company (KO): The Biggest And The Best

Valuation, Competition, and the Dividend

Coca Cola currently trades toward the low end of its historical range at 18.5 times earnings, at a premium to some other companies due to their perception as a rock-solid company.  When the company reports earnings next Tuesday, the consensus estimates call for $2.00 per share, which is expected to rise to $2.17 and $2.37 in 2013 and 2014, respectively, for expected annual growth of 8.5% and 9.2%.

Generally, I like to see a P/E ratio of no more than twice the earnings growth, and Coca Cola is right on the borderline.  However, the company warrants a higher valuation due to its dominant position in its industry as well as for its excellent balance sheet.

Coca Cola also pays a nice dividend yield of 2.75% and has an excellent history of raising the payout (see below – the raise is almost perfectly linear).  I would actually be very surprised if we did not see an additional increase for 2013.

The only real rival, in terms of size and resources is PepsiCo, Inc. (NYSE:PEP), which appears to be a bit less attractive than Coke on a valuation basis at 19.5 times TTM earnings, and a similar growth rate.  Additionally, I would place more value on Coke because of its dominant market share.  Pepsi also has a less favorable balance sheet, with $4.4 billion in cash and $20.6 billion in long-term debt.  Don’t get me wrong; I like Pepsi as a company.  I just think Coke is the better choice right now.

Conclusion

As long as this upcoming earnings announcement and call doesn’t reveal any crazy surprises, Coca Cola should remain a nearly bulletproof investment for years to come.  Great buybacks and clockwork-like dividend raises are the holy grail of income investing, and Coke succeeds admirably in both of those categories.

The article The Biggest And The Best originally appeared on Fool.com and is written by Matthew Frankel.

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